The Bull

Thursday 20

September, 201810:46 PM



Super & Retirement question

Should I roll my SMSF into an allocated pension?

Should I roll my SMSF into an allocated pension? Jeremy Gillman-Wells

I have a self managed super fund, I will be of pension age in 7 months. I would like to roll my super over into an allocated pension and still self managed it if possible. I would like to know the pros and cons of this move, would the fees cost about the same as the 15% tax you pay by keeping it in super for example. I am on a disability pension I don't own my own house, my super is worth about $400,000. Janice C.

Response:

Besides excellent control, one of the main advantages of a self managed superannuation fund, is that you never have to change "product" simply because you want to move into income stream phase and pay yourself a pension.

Prior to moving into pension phase, the first step is to check your trust deed. The trust deed must state that you are allowed to commence an allocated pension/account-based pension. Generally, whenever you change strategy with your self managed super fund, it is a great time to review and update your trust deed. This is something that your accountant or financial adviser can help with in order to ensure that you have the most flexible (and legislatively compliant) super fund structure going forward.

The next step is to apply to the trustee of your self managed super fund (you) to commence an account-based pension as at a certain date. You then value all of the assets in your self managed fund on that date(or those assets that are going to be used to start the pension). This value determines the minimum amount of income that you will need to draw up until the next 30 June.

Pros of starting an allocated/account based pension:

Whether you are in the accumulation phase or in the pension phase, you maintain control of the investment strategy, tax effectiveness and pension payment amount when you have a self managed fund. Most people start a self managed fund so that they can have this level of control so it is nice to know that nothing changes when you move into pension phase. The income stream is highly tax effective. There are two scenarios:

Under age 60: Your member account balance is divided into the tax-free component (made up mostly of your own personal after-tax contributions but also any pre-July 1983 contributions, concessional amount, post-June 1994 invalidity amount and the CGT exempt component); and the taxable component (made up mostly of employer contributions, salary sacrifice and personal contributions that you have claimed a tax deduction for).

Let's say that your tax-free component was 40% of your balance, then 40% of your income stream would be entirely tax free.

The remaining 60% would be taxed at your marginal rate, less a 15% tax rebate on this amount - so even under age 60, the pension is very tax friendly.

Over age 60: The pension income stream is completely tax-free and you cannot get better than that!

Furthermore, in relation to tax effectiveness, all future earnings on investments within the fund are completely tax-free. That means, if your self managed fund contains investments of a $100,000 bank account which earns $7,000 pa interest; and $300,000 in shares paying $10,500 per annum in fully franked dividends - then not only will you pay absolutely no tax at all on these earnings, but you will actually receive a refund of all of the franking (company paid tax). In this example, that's a tax refund of $4,500! This is a significant net boost to your fund earnings.

A point to note here is that if there are other members in the fund who will be staying in accumulation phase, it may pay to check with your accountant or financial adviser if it is appropriate to segregate the assets of the fund.

You can roll back to the superannuation accumulation phase at any time. this means that you are not stuck with being forced to draw a minimum income every year if the income is no longer required.

There is no maximum drawdown amount - meaning you can withdraw the entire balance of your superannuation if you would like. (Bearing in mind that there would be tax to pay in most cases if you are under age 60. Conversely, if you are over age 60, this withdrawal would be tax-free - however it would now be in your name and therefore all earnings would be taxed at your marginal rate).

Cons of starting an allocated/account based pension:

There are government set minimum pension drawdown limits that must be taken at least annually. Even if you don't need the income, you must draw the minimum or your fund may be in breach of the legislation and lose its complying super fund status. The minimum drawdown amounts are shown below:



The major disadvantage for you is that as soon as you move to pension phase, the full balance allotted to the account-based pension will be counted for the Centrelink assets test. Furthermore, the pension income will be counted for the Centrelink income test (less the Centrelink deductible income amount). This applies at any age, irrespective of whether or not you age pension age. Since you are on disability support pension the move into account based pension will definitely impact your situation. This could mean your disability support pension will be reduced or potentially cease altogether depending on your other assets.

The account-based pension is slightly more complicated than accumulation phase in terms of pension payment management and accounting - however the cost for ongoing accounting should not be very much more than accumulation phase.

Considering all of the above, retaining funds in the accumulation phase may help you to retain the Disability Support Pension for at least the next 7 months. In order to meet your income needs, you could withdraw a lump sum (tax free) from the self managed fund.

Any way you cut it, after you reach age pension age, the assets of the self managed super fund will count for Centrelink purposes. Starting the allocated pension at that time, may be in your best interests to minimise the impact of the income test and to provide you with a regular income to meet your lifestyle needs.

Disclaimer: This article is general in nature and is not intended as investment advice. Readers should always seek further advice before making any financial decisions.

Jeremy Gillman-Wells is an Authorised Representatives of AMP Financial Planning Pty Limited | ABN 89 051 208 327 | AFS Licence No 232706.

 


» Subscribe to TheBull's free weekly newsletter to receive all the latest news and views from Australia's leading journalists. Ask us a question

PLEASE SUPPORT OUR SPONSORS, AUSTRALIA'S LEADING BROKERS:



© Copyright TheBull.com.au. All rights reserved.