Reducing the tax bite on your super
ACCOUNT based pensions, formerly known as an allocated pensions, can be great tax savers because they allow a retiree to hold money in a tax free area while drawing a tax free income once they have reached 60. The disadvantage of them is that a minimum amount must be withdrawn each year.
Early last year when markets had slumped because of the global financial crisis, submissions were made to the Commonwealth government pointing out the difficulties faced by retirees who were forced to withdraw capital from their pension funds at a time when asset values had slumped.
The government responded promptly and in February 2009 announced changes which halved the minimum amount that must be drawn from an account based pension. For example, for those aged between 65 and 74 the minimum withdrawal was reduced from 5 per cent to 2.5 per cent.
The changes were a temporary measure in response to the global financial crisis and it was expected that the normal drawdown rates would apply from July 2010. On June 30th 2010 the government announced that the reduced drawdown minimum requirement would remain until 30 June 2011.
This will be good news for some retirees but there are other options available as well.
For example, you could commute your account based pension fund back into superannuation. There should be minimal cost in doing this, and you could then make withdrawals as required - there is now no compulsion to withdraw money from your superannuation.
The downside of this is that you would be moving from the tax free account based pension area, to the superannuation area where earnings are taxed at 15 per cent. This may not be a problem if part of your fund income includes franking credits as they could easily wipe out any tax that was payable.
A further option is to quit the superannuation system altogether. After all, if you are retired, the main purposes of holding money in superannuation is to minimise tax. However, the latest increases in the amount of tax offsets available to retirees mean that a single person who is eligible for the Senior Australian Tax Offset (SATO) pays no tax if their annual taxable income is under $29,867 and for couples $25,680 each.
Withdrawals from superannuation for these people are now tax free, so if you have a relatively small amount of assets outside of super, and not a huge balance inside it, it may well be viable to withdraw all the money you have in super and invest it in your own name. You could still hold it in bank accounts, managed funds or shares but there would be no requirement to spend a minimum amount each year.
Naturally any changes should be done with advice because there may be Centrelink implications, but the above examples highlight the fact that expert guidance can improve a person’s situation.
Noel Whittaker is a director of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is email@example.com.