Since the introduction of the Government’s “simple super” regime on 1 July this year, it is no longer a mandatory requirement for retirees to convert their superannuation assets to a pension arrangement. This means, in effect, that if you don’t need the regular income a pension provides to pay the bills, you can leave your cash in accumulation phase indefinitely.
This change has largely been driven by the Government’s recognition that many people wish to keep working, and contributing to their pension pot, past retirement age. The additional benefit for Government is that people who do so may be less reliant on social security benefits when they do eventually stop work.
So how does a retiree decide when to cash-in their super? Principal advisor Peter Keogh at Bryon Capital says: “One potential downside of commencing a pension is that the client may not need the minimum level of income that they must draw – for instance, they may have income from other sources, such as investments in their personal names or employment income.”
Taxation payments, however, will be higher where an individual leaves their assets in a super fund. Keogh explains: “The main difference between the accumulation phase and the pension phase relates to the tax treatment of the earnings within the fund. In the accumulation phase, earnings on a super funds are taxed at up to 15 per cent.
“Once a fund converts to paying a pension, there is no tax payable on the earnings. So say a member had an account balance of $500,00 and generated 8 per cent ($40,000) assessable earnings. Assuming half of this is income, and the other half realised capital gains, then the tax payable would be around $5,000. If the account had been converted to the pension phase, then the tax would have been nil.”
Director and financial planner Lisa Faddy of Majella Wealth Advisers adds: “Any investment earnings within a pension funds are tax free. Additionally, if you are aged over 60, any pension drawdowns are also tax free.”
But once a pension is commenced, it is no longer possible to add extra contributions, so this will ultimately be the make or break decision for most people at retirement age. However, Faddy warns that while anyone can make contributions to their super fund up to age 65, regardless of whether they are working or not, persons over 65 must pass the work test to continue contributing.
According to the Australian Taxation office, people aged between 65 and 74 must be able to show that they have completed at least 40 hours gainful employment in a consecutive 30 day period, in the financial year in which the contributions are made, in order to meet this test. So people keen to keep topping up their super account will also need to ensure that they remain in regular employment, rather than just casual work here and there.
The costs charged by the product provider when making the switch from accumulation to pension phase will vary, but are impossible to avoid once you decided cash in your super assets. But it is vital that you shop around when looking for a retirement income product, as fees and charges can range enormously.
Finally, if you are unsure about the correct path to take, it may be wisest to just leave your money where it is for the time being, and get some specialist advice. The Australian Securities and Investments Commission provides a word of warning to: “Some retirement decisions can prove impossible or expensive to change. Leave your super inside your fund, or inside the superannuation system (for example a rollover fund or approved deposit fund) until you know exactly what to do.”