Pension Strategies

1. Introduction
2. Background
3. Post 55 (or preservation age) and Early Retiring Strategy
4. B4 starting a pension – add savings to your super
5. B4 starting a pension – no Savings! then withdraw & re contribute
6. Draw a pension & working at the same time & salary sacrifice
7. Segregating Pension Assets
8. Deed to sell assets in pension phase pre death, triggered by death
9. Inheritance Strategy
10. Downward Trending Market Strategy
11. Reserves
12. Commute a pre1.7.07 AP re a pre.7.83 & increase the Tax Free portion

Introduction

Since the ‘simplification’ of the superannuation rules on 1.7.07, planning and strategies have evolved under the new rules. As is the case with revised laws, it takes a few years for the laws to be practically applied to client situations by the vast majority of advisers. Some of the more important changes to the law that have been the source of these strategies include the:

• tax exemption on income in pension phase,
• the caps on contributions,
• removal of compulsory cashing of benefits, and
• the new standards for pensions: the proportionate rule and minimum and maximum amounts to mention a couple.

However as always new laws are being introduced and in may cases these laws stem from reviews, such as the Cooper, Henry, and Harmer Reviews. For those wishing to keep ahead of proposed legislative changes <click here> for a place to start.

Background

In order to read these strategies you should read the section Transition to <Retirement Income Streams> and <Pensions>. However for those that want to go head with this section without reading the former sections, to assist we have linked the terms used in these strategies to the other sections of the website to assist your understanding.

Some of the terms you should read are: Super Interest, Proportioning Rule, Treatment of Net Income .

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Post 55 (or preservation age) and Early Retiring Strategy

As soon as you reach your preservation age you should request your adviser to determine whether it is in your best interests to start a Transition to Retirement Income Stream pension (“TRIS”).

Based on the Treatment of Net Income you can avoid the erosion of your tax free portion by commencing a TRIS as early as possible and preserve (lock in) and maximise the tax free components of your accumulation interest by commencing a pension. Remember once the pension starts, the tax free percentage is locked in for life of the pension!

This means that on withdrawal of your benefits you can save tax depending on your circumstances (age) when you withdraw or if you’re the last surviving spouse, then your children will save tax.

B4 starting a pension – add savings to your super

Whether you decide that its worth while to commence a pension early <TRIS> or as a Pension after 60 (“ABP”), you should review your financial position to see if you are capable of making further non concessional contributions form your savings outside of superannuation .

This is important because earnings on the pension assets are tax free, whereas they are not outside of Superannuation. Accordingly most people want to get as much into superannuation as possible as they approach retirement. However if you fail to plan ahead with your contributions, the rules allow non concessional contributions to be contributed in advance, <read more on this here>

Non concessional contributions add to the tax free component and changes the percentage in favour of the tax free portion. Remember, the percentage is set at the commencement date of the pension. Therefore adding non concessional contributions right before the commencement starts is a great idea.

Also consider Cherry Picking a UNPB to take a Pension

B4 starting a pension – no Savings! then withdraw & re contribute

Whether you decide that its worth while to commence a pension early (TRIS) or as a Pension after 60 (“ABP”), and even where you do not have surplus savings outside of superannuation, you can still increase the tax free portion of your superannuation with the popular Re Contribution Strategy.

The Strategy is best described by way of example. Let’s say Richard is 58 and has a total superannuation account balance of $450,000 and a 10% tax free portion, that is $45,000 is tax free. He wishes to commences a pension having met a condition of release and wishes to implement the Re-Contribution Strategy. Before commencing the pension he withdraws up to the <lump sum tax free> amount which is presently $165,000, no tax is payable as up this threshold the payments are tax free regardless of the taxable component being 50% of the amount withdrawn. Richard then re contributes the amount withdrawn as a non concessional contribution which adds to tax free portion of the accumulation interest of $45,000, giving a total tax free amount of $210,000 of the new account balance of $615,000. If Richard starts a pension with 100% of the accumulation interest, the tax free portion will be 34% for the remaining life of the pension interest. More than a 300% increase in the tax free percentage, a great result.

Draw a pension & working at the same time & salary sacrifice

A strategy could be formed by working out how much and what parts of existing superannuation interests should be used to commence a pension with the view to continue working, some of the benefits of such a strategy could include:

• Lower income tax rates by increasing the salary sacrificed amount into superannuation (accumulation interest) .

Segregating Pension Assets

When paying a pension there can be tax savings from segregating pension assets,  read more about the rules relating to <segregating assets>.

Implementing a segregated pension strategy is derived from the fact that despite over what period a asset experiences unrealised gains during its period of ownership, if it is sold just after it has become segregated, the whole realised gain will be (sale price less cost base) will be exempt.

Conversely, where an asset has a large unrealised gain and for example the member dies resulting in a death benefit being paid, and the assets sold ‘out of pension phase’ a CGT event occurs and tax is payable. Accordingly a prudent approach maybe to realise capital gains and re purchase new investments. However selling and purchasing the same assets back may trigger part IVA.

Deed to sell assets in pension phase pre death, triggered by death

There are some deeds that have been drafted that aim to have the death of a member trigger the sale of the members pension assets and in doing so the gains become exempt income. The pension assets are normally sold to the spouse/children of the deceased.

Inheritance Strategy

Where you receive an inheritance, examine to see if you can make a contribution to your Super and whether the inheritance is better off in your Super. The benefits are either the accumulation interest SMSF tax rate of 15% or the Tax Free rate in pension income, as well as increasing the Tax Free portion of your account balance.

You can make contributions whether your in Accumulation mode or pension mode. If your in accumulation mode making a non concessional contribution is relatively easy provide your within the caps <see non concessional caps>.

However when your in pension mode you need to commute all or a part of the pension back to an accumulation interest (provided you are under 65 or meet the <work test>). Again you can then commence a new pension with the increased Tax Free portion together with the income from your investments being Tax Free. To read more on steps to start a pension <click here>.

Downward Trending Market Strategy

Convert to a unsegregated assets pension. The reason is simply that the full capital loss is carried forward to future years to be offset against both segregated and unsegregated assets.

Reserves

Reserves can be created in accumulation or pension phase, and can be allocated to members accounts in accumulation or pension phase. To understand the basics of reserves <click here>.

Advantages of adopting a Reserving Strategy can be used to:

• reduce the taxable component – by decreasing the earnings allocated to the members account and as earnings in an accumulation interest add to the taxable component, the reduction in earnings allocated to the members account effectively increases the tax free portion is. Further when there is an allocation from the pension reserve to the members account when it is in pension phase, the tax free and taxable components will have already been set, accordingly the allocation will be added to the respective proportions of tax free and taxable components in the same percentage, again maximising the tax free portion.;
• to fund an anti-detriment payment. However this strategy involves a payment to a beneficiary that adds to the members account balance, and since a payment is made direct to the beneficiary not to the members account, then it will not have been made soley to fund a pension current liability and accordingly will not satisfy the exception and thus be a concessional contribution to which the concessional cap will apply. Read more on the <Anti Detriment strategy>.

Disadvantages of adopting a Reserving Strategy are;

• the exempt income for a pension is not available as the assets are not being use to fund a current pension;
• Compliance – while not a major disadvantage, a reserving strategy must be prudentialy managed and maintained each year. This is separate and distinct form the investment strategy.

Commute a pre1.7.07 AP re a pre.7.83 & increase the Tax Free portion

(2- commute a pre1.7.07 pension to determine a pre june 83 component and thus increase the tax free portion)

 

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