Superannuation Strategies for the Wealthy & the Wise – Part 2
posted on January 6th, 2012 by Bellmont Research Team
My last article was about some of the treasures that superannuation can offer both retirees and pre retirees (of any age). This month I have continued that article, with another selection of superannuation tax treats!
The transition to retirement provisions came about as a result of the need to supplement the income of people wishing to semi-retire. The provisions allow anyone over their preservation age (currently 55) to roll over their super to a Non Commutable Allocated Pension. They can then draw an income from their pension, up to a maximum of 10%, and also subject to a minimum amount. By salary sacrificing to superannuation, and then replacing your income by drawing a monthly pension, those on tax rates of 30% or higher may be able to reduce the total tax payable.
There is software available where we can calculate not only your potential tax benefit, but also at what point you can equalise your income, thereby allowing your tax benefit to accumulate as a retirement benefit in your superannuation fund. This strategy is most effective for those with high incomes, high superannuation balances and those aged 60 or more. It may also be effective for anyone over 55 who is still working.
It is common for me to meet people who have cash flow issues, particularly since the Global Financial Crisis. One of the things they decide that they can no longer afford is personal insurance. The problem with this thinking is that if you can’t afford the insurance, then how will you cope if you cannot work for say, six months, and have no income protection? This happened to me years ago, and was not a pleasant experience.
For many people, the best place to hold your personal insurances (life, total and permanent disability and income protection) is inside superannuation. This means that you are not paying for it from your personal cash flow. As long as there is sufficient value in the super to fund the cost of the insurance premiums, then the cash flow problem of paying for the insurance is solved. The cost is sometimes less inside superannuation than outside, and if you are eligible to make deductible contributions to super, you can pay for your insurance with pre tax dollars.
I have met a number of clients with large lump sums who want to get as much as they can into superannuation. This happened in June this year and my strategy was as follows:
Estate planning is one of those issues that in spite of the fact that most of us don’t want to address it, it won’t go away. We all need to ensure that our assets go to our nominated beneficiaries, and that they are distributed in a tax effective manner. A lack of planning could well result in a boon for the tax office, and less for those we love.
Superannuation can allow for tax effective estate planning. Super is particularly effective if left to a spouse (includes de facto/same sex spouse, interdependency relationship and financial dependant) or minor child (under age 18). There is no lump sum tax payable on the proceeds from a superannuation policy, and if left as a pension to minor children, they are taxed at adult rates. As well as this, a pension when paid to a pension dependant (includes all those listed above) receives a 15% rebate on the income. Let’s look at an example:
If Jack (age 10) receives a pension of $40,000 per annum from his mother, Jill, who died at age 40, how much tax will he pay? We are assuming no tax free portion. It is also important to note that Jack will pay adult tax rates, which are much more generous than child tax rates.
Pension Rebate 15%: $40,000 x 15% = $6,000
Tax on $40,000: $6,000
Tax payable: $6,000 – $6,000 (rebate) = Nil tax payable.
This pension can only continue until Jack turns 25, and then it must be commuted to a tax free lump sum.
There are still a whole host of benefits that super can offer that I have not discussed here. If you have any questions, please send them in and I can answer them in my next article. Of course, for a comprehensive analysis of your own financial position, nothing beats professional advice.
Janne Ashton – Plan Protect