Originally posted on 19 December 2011

Q: I am turning 55 next year and I have been told I should look to set up an Allocated Pension even though I am still working. I earn $140,000, have a little more than $600,000 in Super. I don’t need any more income and don’t want to draw on my Superannuation savings. Why should I consider an Allocated Pension now?

A: Even though you are still working, as you are over 55, you are entitled to establish an Account Based Pension (an Allocated Pension is one of these). The strategy to draw on your Super whilst working and continue to contribute to Super is called a Transition to Retirement Strategy (TTR) .Even though you draw on your Super savings, you can actually boost your overall Retirement position.

The advantages of establishing the Account based Pension are as follows:


Super funds pay earnings tax at 15% on income to the fund, Account based Pensions are tax free and are still entitled to claim back Franking Credits.


At 55 you are only required to draw income from the pension at a minimum rate of 3% a year. The maximum you can draw whilst still employed is 10% a year. As you get older the minimum amount required to be drawn increases but the maximum you can draw will remain at 10% until you reach age 65, retire or meet another condition of release.


The pension payment drawn from an Account Based Pension is taxed concessionally. The portion of funds contributed from after tax dollars within your fund can be received tax free as income. This component is referred to as your “tax free component”. The “taxable component” which comprises earnings on funds and contributions made where a tax deduction has been claimed by an individual or employer, is taxed at your Marginal tax rate but also attracts a 15% tax rebate. When you turn 60, all pension payments received will be tax free.


After drawing down your pension payments, you can then contribute more of your before-tax salary back into Super through salary sacrifice contributions. This salary sacrificing, combined with the above pension tax benefits, can result in a boost to your retirement nest egg and reduce your overall tax paid.


It is important to remember that there are limits to the amount that can be salary sacrificed into Super without incurring tax penalties. The “Concessional” Contribution cap is $50,000 per year for those aged 50 and over. From 30 June 2012 this cap will revert to $25,000 for those with more than $500,000 in Super. Please be careful as the amount counted towards this cap also includes employer’s existing contributions, such as the 9 per cent Super Guarantee Contribution.


If you are already making Salary Sacrifice contributions at the maximum rate, you can still make contributions into your Super fund as “Non-Concessional” contributions i.e. from after tax dollars. The limits on these contributions are $150,000 a year or $450,000 every 3 years if you are under age 65.


In most cases, if you are 55 or older you will benefit from using an Account based Pension to optimise retirement savings. A Financial Planner will be able to estimate the benefits of using the strategy. Whilst the tax concessions remain, use them. Make sure you get advice as getting it wrong can lead to unintended consequences.


This article was published in The Australian on 17 December 2011. A direct link to the article can be found here.
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