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Self Managed Super Fund (SMSF) Article
Transition to Retirement
By Tony Negline.
This article may be out of date.
21st July 2005
It's hardly surprising that Australians retire when they are too young given that some very important superannuation tax concessions become available from age 55 onwards:
- the Post June 1983 tax free threshold becomes available. This threshold, which is indexed each 1 July and this financial year is worth $129,751, allows an investor to withdraw lump sums from super tax-free
- upon reaching age fifty-five income payments from a superannuation pension or annuity may be paid with a 15% rebate. This rebate can significantly reduce the amount of income tax paid on the investor’s income paid from the income stream
- any benefits assessed against an investor’s lump sum Reasonable Benefit Limit before age 55 will be assessed against a reduced RBL. (The lump sum RBL is reduced by 2.5% for each year an investor is aged under 55.) Once an investor reaches age 55 all benefits are assessed against the full lump sum RBL
- lastly, if an investor, who stopped work before age 60 can declare that they will never work again then all their preserved super benefits can be paid, in full, as a lump sum or pension.
It is reasonable to assume that at some stage these concessions will be changed because the government has been changing other aspects of the retirement income system to get people to work for longer in order to cater for population aging.
The great unknown is how long these concessions will remain unchanged and what form the changes will take when they are made. Will the concessions remain the same but become available at older ages or will they be down-graded or removed altogether?
In some instances the government has been making it harder to access some concessions. Until a couple of years ago it was also possible, with clever structural planning, to receive Centrelink benefits such as Mature Age Allowance (MAA) between age 55 and age pension age. MAA has no work test (it does have income and assets tests) so it was possible to retire on government welfare at age fifty-five. Applications for this benefit have not been accepted since September 2003 and people over 50 but under age pension age now apply for Newstart Allowance (ie, the dole). Centrelink then works out how much effort these people need to make to find a job or be retrained in order to receive Newstart on an ongoing basis.
Most recent legislative changes have made the rules more flexible and have given investors a greater range of choices in how they plan their lives. For example, one welcome change allows investors aged at least fifty-five but not permanently retired to access part of their preserved super.
Anyone who wants to take super benefits in this way must be prepared to begin a non-commutable pension or annuity. Non-commutable means that lump sum withdrawals cannot be taken out of the product. The product will remain non-commutable until the person is permitted to access their preserved super. In general terms access to preserved super is allowed upon retirement but there are a set of rules which must be satisfied if you cease work before age 60 and another set of rules if you cease work between 60 and 65.
Effectively the government is allowing people to receive some income from their super investment while they continue to work. This new policy has sent financial planners scurrying back to the drawing board to re-examine the strategies they suggest to clients. From a financial planning strategy perspective, this new policy is far-reaching. It will take sometime before all possible strategies have been discovered.
One strategy being talked about involves an investor salary sacrificing as much of their remuneration as they can and then living off the income paid from their preserved super invested in a non-commutable pension. This is an interesting idea however there are a number of points which you must get right. For example, the salary sacrifice arrangement must be on a sound legal footing and the current and future Reasonable Benefit Limit implications must be carefully examined.
All investors thinking of taking advantage of this new strategy must carefully look at the RBL implications of this strategy.
Anyone who runs their own super fund and is thinking of using this new rule should check their trust deed before they implement any of the strategies. Any deed which was purchased more than twelve months ago probably will not allow a person still working to access their preserved super and probably won’t allow some pension types to be non-commutable. It is not good practise for a trustee to rely on a catch all clause which says something like, “the trustees can do whatever the super laws allow and cannot do whatever the super laws do not allow”.
The arrival of this strategy highlights a very important issue for SMSFs. Some SMSF practitioners recommend that people update their deed every twelve months. This may be overkill. A trust deed should be updated about every four years or whenever something important is going to happen in a fund.
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.