Low Hanging Fruit – Starting a pension

Disclaimer
The information in this article contains general advice and is provided by Hood Sweeney Securities Pty Ltd AFSL No.220897. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. Please refer to our FSG (available at https://www.hoodsweeney.com.au/services/financial-planning/how-we-service-our-clients/financial-services-guide) for contact information and information about remuneration and associations with product issuers. All examples are provided for illustrative purposes only.

In this thought leadership series, JC Botha* explores three frequently underestimated opportunities that can significantly impact one's financial position. In Parts 1 and 2, we discussed Age Pension and Commonwealth Seniors Health Card, and unused concessional superannuation contributions. In the final Part 3, we will analyse the benefits of starting a pension.

Moving into retirement

Transitioning into the different phases of life, often brings about significant financial changes and this is no different when it comes to retirement.

A question for many has become, when do I retire? In recent years the lines have become blurred, making the financial planning around this more challenging to comprehend. Gone are the days for many having a definitive date for full or instant retirement. It has become common practice to take a phased approach to retirement and slowing down before stopping.

When it comes to the rules of accessing your superannuation savings and the associated tax benefits, the dates (ages) are set. Understanding how these could impact your transition into retirement is important and could save you a significant amount in tax.

The tax differences between accumulation and pension phase

In Australia, we have what is called a frontloaded tax retirement system. Making concessional superannuation contributions are taxed at 15%. All investment income in the superannuation fund, which is in accumulation phase, is also taxed at 15% and capital gains at 10%.

However, once you get to retirement and move into pension phase, this is a tax-free environment. Many other countries have this the other way round. The goal, simply put, is to get to pension phase with as much as quickly as you can.

How it works

There are essentially two key ages. Age 60 and 65. Once you reach age 60, called preservation age, you could move into pension phase subject to meeting a condition of release, which is essentially to stop work and go into full retirement.

With an aging population and most people still generally healthy and active at 60, many push on to a later retirement date and don’t meet this condition. At age 65 however, one can move your superannuation accumulation savings, subject to a $1.9m limit, into pension phase regardless of whether you are still working or not.

Let’s look at the potential tax savings by way of an example:

John just turned 65 and is happily still working as a medical doctor. He has $1.9 million in his superannuation accumulation account. Assuming the investment income of his account is 5% and capital gains 3% and realised annually, the tax payable by his accumulation account is $19,950. If this were in pension phase, the tax would be nil.

Summary

Individuals aged 60 and above, particularly those over 65, may not be aware that they can transition their superannuation savings from accumulation to pension phase. There are also various strategies around this decision, which might include the recontribution of pension income to superannuation, even if a pension account is already in place.

After reaching age 60, it is important to carefully consider practical retirement goals, financial planning strategies, and how these fit into a comprehensive financial plan. As always, we recommend seeking financial planning guidance to find out more about any of the strategies outlined in our three-part series.

*JC Botha is a Director and Senior Financial Planner l Strategy & Investments and Representative of Hood Sweeney Securities Pty Ltd AFS Licence No.220897.