Q. I am 67 and a self-funded retiree.  I have left a substantial amount in an accumulation account because, at present, I can manage on my other superannuation pension. I realise that 15% tax on earnings is made in the accumulation account. My plan was to avoid making the annual minimum draw -down in order to maintain a “pot in reserve”.Franked credits mean that I pay no tax on some other share earnings outside of superannuation. My financial arrangements are simple – but are they wise?

A. Investment earnings within a Superannuation fund are taxed at 15% whereas earnings within an Allocated Pension are tax free.  Having your funds in an Allocated Pension requires you to draw a minimum payment each year.  As you are 67, the minimum draw rate for this Financial Year is 3.75%.  Next Financial Year it will be 5% but the government may revise this down due to the GFC, as they have for the past 3 Financial Years.

As you are over 60, any income you draw out of your Allocated Pension is tax free and does not count as assessable income.  Just because you draw on the Allocated Pension, doesn’t mean you have to spend it.  If you do not need the income to live on, you can always reinvest the funds.  If you satisfy the work test, 40 hours work in a 30 day period within the financial year, you are eligible to recontribute the money back into the Superannuation system.

If you receive the Age Pension, you would need to consider the impact of receiving additional Allocated Pension income under the Income Test.  Given your age, in either Superannuation or Pension mode, your assets are fully assessed for Centrelink Assets test purposes anyway, so receiving this income I don’t believe would impact greatly.

Identify the tax you are paying within the Superannuation fund, then compare this to any loss of Centrelink benefits.  As you are over age 65, you would be entitled to the Senior Australians and Pensioners Tax Offset (SAPTO) , which mean you can effectively earn up to $32,279 as a single or $57,949 as a couple.  So you would have to earn quite a bit of income before paying more tax outside the Superannuation system. Franking Credits are not a consideration, as you are entitled to a refund on them anyway.

I am a firm believer that you should make the most of every opportunity to pay as little tax as legally possible and use available structures and strategies optimally.  I see no advantage in you leaving your funds in Superannuation as opposed to receiving tax free income in Allocated Pension mode.

The above Q&A was originally published in The Australian