First Question
Craig, I appreciate your constant guidance. I am sure you have already responded to this, but I did not notice. Each of my spouse and I has a modest super pension account, valued at $60,000 and $90,000. Because of reducing contributions, we also have $500,000 in other accumulating accounts. Should we make a partial or complete transfer to our pension accounts?
Yes, moving your super into a pension is usually a smart option because all of your profits there are tax-free, while your super's earnings are taxed at 15% (minus any offsets). Consequently, your pension fund will generate a larger net (after tax) return for the same investments.
Recent research on this subject was published by the Super Members Council. Approximately 700,000 Australians over 65 who do not have full-time jobs have an accumulation (savings-phase) account, according to the study. They can be paying extra, needless taxes as a result.
According to the research, "A person may have to pay an additional $4500 in super taxes throughout their retirement if they choose to keep $100,000 in an accumulation account rather than transfer it to a pension account." The additional tax for balances of $200,000 might be $9000.
But you also have to consider that money can simply sit in super while it is there. You must take out a certain amount annually during the pension phase.
The table below illustrates how the minimum is determined by your age and account balance.
Describe
a wrap-style super fund. What are their benefits and drawbacks in comparison to a typical industry super fund?
You or your financial advisor can access a variety of investments that would not be available to you otherwise with a wrap-style super fund.
These could include investments that are not listed on the stock exchange, managed funds, and shares, including foreign shares. Additionally, they provide comprehensive and advanced transaction and reporting features.
The way they handle taxes is another possible benefit. Since taxes are typically determined on an individual basis, they are fairly and transparent. This is only beneficial, though, if you take into account the tax ramifications of any transactions, switches, or redemptions. I have witnessed a few folks get caught off guard when they withdraw these monies without realizing they must first settle unpaid tax obligations.
Taxes are computed at the fund level rather than at the individual level when using an industry super fund. Your balance should be net of any tax liabilities because any tax is already included in the unit costs. You do not, however, have any control over the tax.
Although wraps provide greater tax clarity and investment options, they do come at an additional expense.
You must determine whether you require all of those extra investment possibilities. There are many high-performing, reasonably priced industry funds to pick from if you feel comfortable delegating the investment decision to your super fund.
Third Question
All super contributions must go into my smaller accumulation account rather than my account-based pension as I am still working (self-employed) at age 66. If I continue to work, will I be able to continue building smaller pension accounts from my accumulation account during the ensuing years? in order to reduce income tax.
Yes, but it is important to note that you cannot increase your pension after you start with your super. You can, however, open a new super accumulation account for any further contributions you have made.
As long as you remain below the transfer balance cap and reach the minimum starting balance set by your super fund, which is normally between $10,000 and $50,000, you are free to start as many pensions as you desire. As an alternative, you can start a new pension after combining the assets from your current pension by rolling it back into your super accumulation. In the long run, this might be simpler to handle.
Many industry players and super funds are pushing for a change that would allow them to directly contribute to a pension plan. Currently, having distinct (many) pension and accumulation accounts is a bit of an administrative burden. We will have to wait and see whether they can get the regulations altered.
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