Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 498

Drawing more than you need to fund your super pension

Pension paying super funds are required by the government to make minimum annual pension payments essentially to ensure they are being used to provide a retirement income rather than just being used as a tax-advantaged method of building wealth for beneficiaries. If a super fund, including SMSFs, fail this minimum pension test, they lose concessional tax treatment, and the tax rate reverts to the normal 15% rate applicable to accumulation superannuation accounts rather than the 0% applicable to a pension paying fund.

Many in retirement live a reasonably frugal lifestyle and those with large super balances find themselves with excess cash coming in each month. This will likely be exacerbated from 1 July 2023 if the rates revert to normal after three years of half rates. Just getting older exacerbates the situation as the required pension drawdown percentage increases.

The minimum pension drawdown

Consider a retiree couple that has $1.7 million each in pension mode in super, making it $3.4 million in total. They are both 76 years of age, which means they are each currently required to draw a minimum of 3% per annum from their super to fund their super pension, or $102,000. This is tax free income to them.

From 1 July 2023, the required minimum pension drawdown is likely to revert to 6% for a 76-year-old, after which the couple must make combined payments of at least $204,000 from their super for the 2023/24 financial year.

When the couple reaches 80 years of age, the standard rate increases again to 7%. If the pension balances for a couple managed to be maintained at $1.7 million each, the required combined pension payments amount to $238,000, tax free.

Due to indexation, those who start a pension from their superannuation after 1 July 2023 may have a pension account limit of $1.9 million, or up to $3.8 million for a couple. From this, they could be required to draw $190,000 per year at 5%, or $266,000 at 7% if they are over 80. This is after tax income to them.

Equalising superannuation balances

Since pension account caps were introduced from 1 July 2017, at a rate of $1.6 million per individual, it has made sense for those couples with large superannuation balances to aim to equalise their superannuation accounts or at least build each towards the $1.6 million limit. Prior to this, when pension accounts were not limited, there was no major incentive to do so. Due to contribution limits and limitations, equalising member accounts has been fraught with complication.

The requirement to pass a work test to contribute was often a difficulty. The removal of this for those aged between 67 and 75 for non-concessional (non-tax deductible) contributions from 1 July 2022 has certainly simplified the process of evening out superannuation accounts between a couple.

For example, for a couple in their late 60s early 70s where one has a $3 million balance and the other has a $1 million balance, the higher balance member could withdraw $110,000 (to be indexed) each year tax free, gift it to their spouse who then makes a non-concessional contribution to their superannuation account. Over time, the lower balance member can build towards the current limit of $1.7 million (to be indexed). This way a greater proportion of the couples combined superannuation can qualify to be placed in tax-free pension mode. It is also permissible to turbo charge the reallocation by doing a triple contribution in a given year, then sitting out the next two years.

As with all superannuation contributions, care needs to be taken to get it right. SMSFs can be handy when extra flexibility is sought and to enable easier access to withdrawals and contributions.

Where to put the excess from your pension drawdown

A retired couple can live a comfortable lifestyle with a mandated yearly pension drawdown and still have plenty of money to spare. So what can they do with that money?

An alternative could be to set up another non-superannuation investment account – either in joint names or, if there is other substantial wealth, in the name of a family trust or investment company. The pension payment can then be paid to that investment account and the couple can draw only what they need and invest the remaining balance. Depending on whether they have any other taxable income, investment earnings could attract very little tax due to the individual’s tax-free threshold.

The decision as to the name in which the portfolio is held will depend on a number of factors. For example, a personal or joint portfolio will be the simplest, but doesn’t provide asset protection or tax benefits. Income is just taxed at the individuals marginal tax rates. A tax return may need to be lodged in the future whereas maybe this hadn’t been required prior to the portfolio being established.

For larger portfolios it can be useful to use a structure, a family trust or a personal investment company, to house portfolios that can’t be added to a superannuation account due to limits imposed thereon. Family trusts and investment companies can be flexible and can add tax efficiency and asset protection advantages. However, there is a cost involved in preparing annual accounts and tax returns.

This strategy of having a secondary investment portfolio can be particularly useful when one spouse dies, and a large lump sum superannuation death benefit may be paid out. This death benefit can also be added to the non-super portfolio.

Some wealthy retirees also use the spare income to assist their children or grandchildren. Using a tax-free superannuation pension income is a great way to fund the part payment of a grandchild’s non tax-deductible school fees, for example.

You may even wish to donate more to your charities of choice and get to see the benefits conferred, rather than leaving bequests as part of your estate planning.

Whatever you do, all the money accumulated over a working life should be doing something useful, and not just sitting idle. You’ve worked hard for your money, and now that you’re in retirement, make it work for you.

 

Michael Hutton is a Partner of Wealth Management at HLB Mann Judd, Sydney. This article is general information and does not consider the circumstances of any individual.

 

5 Comments
S Raj
October 25, 2023

My wife and I in our 70’s have a combined smsf in shares at 3M dollars value. We have 2 properties in smsf as well drawing rents. Value of both properties? 4M. How do I work out my 6% draw down per annum?

Mike
March 04, 2023

Hi Michael, regarding " Family trusts and investment companies can be flexible and can add tax efficiency and asset protection advantages. ", could this investment company be an ASIC-registered say ABC Pty Ltd ( $2 paid up capital ) where the excess pension say $2000 is regarded as a loan to ABC Pty Ltd ? And this $2000 is then use to invest in the name of ABC Pty Ltd.

Dan M
March 03, 2023

Thanks Michael good article. In regards to the non-super investment portfolio, many retirees already have these secondary income streams as part of multiple sources of income strategies.
Looking at the personal tax rates the 19% tax rate kicks in at $45K so it would make sense for retirees to try and keep their non-super income under $45K to be tax effective, it’s a tricky situation.

Dudley
March 03, 2023

"personal tax rates the 19% tax rate kicks in at $45K": At $18,201, not accounting offsets: https://www.ato.gov.au/rates/individual-income-tax-rates/#Residents When SAPTO, pay gross dividends <= $29,783 (2022-23). Marginal tax: 0%; +$1: 31.5%. https://paycalculator.com.au/ That > $29,783 best left in company.

John Peters
March 03, 2023

Nice article - wonder if the latest super announcements have any impact on these things...

 

Leave a Comment:

     

RELATED ARTICLES

Super prospects from Australia’s most powerful CIO

2024/25 super thresholds – key changes and implications

The when and why of four million Australian retirees

banner

Most viewed in recent weeks

Meg on SMSFs: Clearing up confusion on the $3 million super tax

There seems to be more confusion than clarity about the mechanics of how the new $3 million super tax is supposed to work. Here is an attempt to answer some of the questions from my previous work on the issue. 

Welcome to Firstlinks Edition 566 with weekend update

Here are 10 rules for staying happy and sharp as we age, including socialise a lot, never retire, learn a demanding skill, practice gratitude, play video games (specific ones), and be sure to reminisce.

  • 27 June 2024

Australian housing is twice as expensive as the US

A new report suggests Australian housing is twice as expensive as that of the US and UK on a price-to-income basis. It also reveals that it’s cheaper to live in New York than most of our capital cities.

The catalyst for a LICs rebound

The discounts on listed investment vehicles are at historically wide levels. There are lots of reasons given, including size and liquidity, yet there's a better explanation for the discounts, and why a rebound may be near.

How not to run out of money in retirement

The life expectancy tables used throughout the financial advice and retirement industry have issues and you need to prepare for the possibility of living a lot longer than you might have thought. Plan accordingly.

The iron law of building wealth

The best way to lose money in markets is to chase the latest stock fad. Conversely, the best way to build wealth is by pursuing a timeless investment strategy that won’t be swayed by short-term market gyrations.

Latest Updates

Financial planning

Our finances should enable and not dictate our lives

Most people would prefer to have more money than less of it. But at what point do the trappings of wealth and success start to outweigh the benefits of striving for more?

Economy

This vital yet "forgotten" indicator of inflation holds good news

Financial commentators seem to have forgotten the leading cause of inflation: growth in the supply of money. Warren Bird explains the link and explores where it suggests inflation is headed.

Shares

Emerging market equities are ripe with opportunity

Emerging markets offer compelling value compared to history and the stretched valuations of developed market equities. Investors can benefit from three big tailwinds, but only if they are selective.

Taxation

Tomorrow's taxpayers pay for today's policy mistakes

Less affordable housing isn't the only thing set to weigh on Australia's younger generations. If new solutions for pension deficits and the use of resource revenue aren't found quickly, tomorrow's taxpayer will foot the bill.

How would a switch to nuclear affect electricity prices?

The Coalition's plan to build seven nuclear power stations in 15 years faces scrutiny due to high costs and slow construction. And it is unlikely the investment would yield cheaper energy for Australian households and industry.

Strategy

Reader feedback from our 2024 survey

Articles that are easy to understand, quick to read, and credible; being able to engage via the comments section; and keeping Firstlinks free and independent are just some of the features valued by our readers.

Strategy

Have your say on Firstlinks and the topics we cover

We’d love to hear your thoughts on Firstlinks and how we can make it better for you. If you’d like to help us out in a just a couple of minutes, please take our short survey.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.