Pre Retirement Financial & Tax Planning

An exciting tax planning strategy that may reduce the tax payable on any income stream (pension) paid to you by your Fund and at the same time creating a significant estate planning opportunity that will greatly enhance the payment made to the beneficiaries of your estate

This strategy involves withdrawing an amount from your Fund within the defined limits and re-contributing this amount to increase the tax free portion of your superannuation interest.  You must be aged 55 and over to take advantage of this opportunity, although those approaching age 55 should commence planning now.

This planning technique is best explained by the following example:

Jane, aged 55, has retired with $365,000 in superannuation (consisting entirely of the taxable component), and wants to purchase an account based pension.  She also receives $10,000 each year in other taxable income and has not received any super benefits in the past. 

After consulting with her financial adviser, Jane:

  • Withdraws $165,000 from her super (with no tax payable on this amount)*, and
  • Re-contributes the proceeds back into her fund as a personal after-tax super contribution#, prior to commencing her account based pension.

The table below shows how the components of her account based pension will change.  As you can see, by using this strategy, her investment will now have a tax free component of $165,000.

*  Jane satisfies a condition of release to access her super because she is over 55 and has retired permanently. 

#  Because Jane is under age 65, she can make super contributions without having to meet a work test.

 

Component    

 

Before Strategy   

 
 

After Strategy


 Taxable  $365,000  $200,000
 Tax Free
 NIL  $165,000
 Total  $365,000  $365,000

Let's now assume Jane draws an income of $25,000 per annum from her account based pension (in addition to her $10,000 in other taxable income).  The next table summarises her income and tax situation in the 2011/12 financial year before and after this strategy.

 

Tax Situation

Before Strategy

 

After Strategy


 Account based pension income payments
 $25,000
 $25,000
 Tax-free income payments^
 ($NIL)
 ($11,000)
 Other Income
 $10,000 
 $10,000  
 Taxable income
 $23,699
 $35,000  
 Tax Payable
 $1,850  $600

Because her account based pension has a significant tax free component after implementing this strategy, she will receive $11,301 in tax-free payments and pay $1,250 less tax this financial year.  Her adult children will also be able to receive a greater proportion of her account-based pension tax-free, in the event of her death.

^  The tax-free income payments are determined by multiplying the tax-free proportion of the income stream at commencement by the annual income payments received.  In this example ($165,000/$365,000) x $25,000 = $11,301.

Note: Jane will pay no tax on her income stream payments when she turns age 60 in 2017/18.

I strongly urge you to take advantage of this opportunity while the current legislation exists.

By re-contributing you are making this amount tax free which means that when you start a pension before age 60, there will be less tax to pay and in the event of your death your non dependent beneficiaries will have less tax to pay.  Non dependent beneficiaries are your adult children and grandchildren.

We recommend that you make an obligation free half hour appointment to see me to discuss any possible advantages and risks involved with the strategy in regards to your personal situations. 

 

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