We have a defined benefit pension should our super be in pension or accumulation phase? January 5th, 2024
We are 70 yrs old and self funded retirees. We have $600,000 in Super in an Accumulation Fund which is taxed at 15%.
Question is, should I change it to a pension fund in Super where there is no tax but with a compulsory withdrawal of approx 5% per year?
We don’t need the money as my wife & I receive $100,000 from Govt under the Defined Benefit Pension for life plus a rental income from an investment property of $36,000. We don’t spend any more than that. We don’t have mortgage or debts.
What general advice would you give to a person in our position - accumulation fund or pension fund in Super?
Can I get my question answered?
The net position will depend a bit on what sort of assets are in the fund and whether the fund manager is actively trading the assets or not.
The tax liability is only a real issue when the fund generates internal income. If there’s lots of share trading going on for example, then the fund will be paying capital gains tax on the profits and this would impact the after tax earnings you receive.
But, if you’re in a big public offer type scheme, you probably don’t have that level control over the sale and the timing of the underlying assets of your fund.
If it is in a big public-offer type fund, you can quite easily see the impact of the 15 percent earnings tax by comparing the returns on the various investment options on a like-for-like basis.
Example:
If your super accumulation fund is invested in say the balanced investment option, look at the actual annual returns of the same balanced option in the pension fund and compare the two. Usually, they comprise exactly the same underlying core investments and the only difference in returns paid to investors, is the effect of the earnings tax. That percentage difference is what the tax actually "cost" you.
The Commonwealth Seniors Health Card
The other thing to consider is if you both have a Commonwealth Seniors Health Card.
If you move to pension phase, Centrelink will include a deemed income amount based on the total amount in pension phase in determining your income test amount. If it is kept in accumulation phase, the balance is ignored. While right now it might not be an issue because of the frozen deeming rates, this is likely to change in July when the freeze ends.
The combined assessable income limit for couples for this card is currently $152,640. That income includes your defined benefit income (before tax), net rental income and any other actual investment income (interest, dividends etc). The deemed income on your super moving to pension phase would currently be about $11,500. That could easily double or triple in July... Again, if kept in accumulation - all completely ignored.
Lastly, if you can satisfy the employment test of 40 hours in a consecutive 30 day period, there’s nothing to stop you paying money into super and claiming it as a tax deduction as a concessional contribution. You could then rip it straight out again, tax-free. You and your partner could only do this up to age 75. It is quite conceivable that you could wipe out all personal income tax liabilities doing this.
Employment can be self-employed or working for someone, even for just a week.