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Preparing for your retirement -€“ Part 1

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Say you’re approaching retirement and you want to get your affairs in order and give your super one last boost. If you’re like the majority of DIY super funds and your fund consists of you and your spouse, it’s common for one of you to still be working, with the other having either retired first or left the paid workforce.

Over the next two weeks, we’ll look at many of the super law issues you must consider by taking into account. To do this, let’s use the following scenario:

The scenario

You’re aged 63 and your spouse is 62 and you have three children. You have a combined $1.2 million in super, which is pretty well all in the Taxable Component of your fund. You and your spouse have worked out that you need about $55,000 per annum (after-tax) on which to live. Your super assets are currently being used to pay a Transition to Retirement (TTR) pension. You plan to be fully retired by 31 December this year. Meanwhile, you also have $130,000 outside of super which you might want to put into super.

The transactions that need to be considered and the order in which they’re completed are important because it’s quite easy to pay unnecessary amounts of tax. If you’re not careful, it’s also possible to miss out on some easily won tax benefits.

Time to retire

In a few weeks you’ll be fully retired, but at present, you’re taking a $55,000-a-year TTR pension, which is tax-free because you’re over 60. Income from any new pensions will still apply after we have restructured your affairs.

If your pension’s account balance was $1.2 million on 1 July 2012, then in the 2012/13 financial year you’ll have to receive somewhere between a minimum $36,000 (3%) and a maximum $120,000 (10%) in income whilst it remains a TTR pension.

Once you’re fully retired, the pension ‘technically’ ceases being a TTR pension and the maximum income requirement disappears. I say ‘technically’ because the TTR restrictions will only disappear if your pension has appropriate documentation.

Also upon permanent retirement, commutations (that is, taking some or all of the pension’s account balance as a lump sum) from the pension should be allowed if your pension’s documentation allows for these payments once the TTR status stops.

Get the tax offset

Assuming partial commutations are permitted, you take $450,000 out of your pension tax-free after you retire on 31 December 2012. You then contribute this money into your spouse’s superannuation account as a spouse contribution, assuming your super fund’s trust deed permits such contributions.

The contribution will be a Non-Concessional Contribution. The purpose here is to potentially pick up the Spouse Contribution Tax Offset, although this offset is only worth a maximum of $540, which isn’t very exciting. However, this tax offset might help pay for any administration costs of putting this strategy together.

To be eligible for the tax offset, your spouse must be your spouse on the date the contributions are made. If your spouse dies or your spousal relationship otherwise finishes, then you won’t get the rebate if you make the contribution after this event.

  • You haven’t make the contributions as your spouse’s employer (this is because you would ordinarily be eligible to claim such contributions as a tax deduction).
     
  • You and your spouse weren’t living permanently apart when the contribution was made.
     
  • Your spouse satisfies an income test, which requires that their assessable income for tax purposes (that is, income subject to tax including realised capital gains) before any tax deductions plus any employer provided reportable fringe benefits and employer super contributions is less than $10,800. A partial tax offset is payable if income as defined here is less than $13,800
     
  • The contribution must be made before your spouse turns 65 years of age. (It’s technically possible to make this contribution after they turn 65, but they would need to satisfy a work test and meet other important details that I won’t look at here.)

A key issue at this point will be when they will be able to receive a pension from this money.

In my view, you won’t be able to access these contributions before your spouse turns 65 if they have not been in the paid workforce for many years.

Before you retire, an important consideration for you is the amount of tax your surviving adult children might pay on you and your spouse’s death. For the moment, it’s worth noting that on your death, your adult independent children would have to pay almost $200,000 tax on a $1.2 million death benefit (that is, 16.5% tax). It’s possible to reduce this amount and we’ll come back to this issue as well as some other contribution and benefit issues in the following article.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

Published on: Saturday, December 01, 2012

The Switzer Super Report is a newsletter and website for self managed super funds. With exclusive commentary from Peter Switzer, Roger Montgomery, Paul Rickard and Charlie Aitken the Switzer Super Report will help you maximise your after tax investment returns and grow your DIY Super. Click here for a free trial or subscribe today.

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