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Over 60 and Not Maximising Super? – MUST READ

Written by Kris Wrenn

As the title suggests, if you are aged 60 or over and are not maximising your concessional (pre-tax) contributions to Super, this article really is a must read for you. Why? Because even if you think you don’t have enough spare cash to maximise your concessional contributions to Super, there is a strategy that Hudson can potentially help you to take advantage of that doesn’t require any outlay from your income or even your savings.

Maximising your concessional contributions to Super can help you to minimise the tax you pay.

The strategy involves us taking a portion of your Super, setting up a Transition to Retirement (TTR) Pension account and using pension payments to increase concessional contributions. You do not need to retire or even reduce your work hours.

The strategy can be particularly effective at present thanks to the new “catch up” rules that allow those eligible to “use up” any unused concessional contributions since the 2018/19 financial year. This potentially means some individuals have a concessional Super contribution limit of up to $102,500 this financial year (very soon to be $130,000 in the new financial year).

Before we get into how it works, first let’s cover off on a couple of items to see if the strategy is going to be appropriate:

Income – I should firstly say that this strategy is only really applicable to those earning an income. The reason being that the goal of the strategy is reducing your tax, and generally speaking you need income to pay tax. Exceptions to this generalisation might include someone who doesn’t earn income, BUT, might be selling an investment (a property?) and realising a large capital gain.

Age – I am aiming my article today at those aged between 60 and 65. It is possible for 59 year olds (those born between 1/7/63 and 30/6/64) to create a TTR pension, however the pension payments would be classed as assessable income. This doesn’t mean that the strategy doesn’t work, but for simplicity today I will only consider those aged 60, because once you turn 60 pension payments are not classed as assessable income and as such have no tax implication. I will also not address those aged 65 and over because those individuals have satisfied a “condition of release” and their Super is already “unrestricted, non-preserved”. They can access it already and don’t necessarily need a TTR pension.

Super balance – As stated, the strategy relies on taking a portion of existing Super, so if you don’t have any Super or if you have a very small balance this strategy is not for you. Conversely, if your Super balance was over $500,000 on 1st July last year, or is likely to be over $500,000 on July 1st this year, be mindful that you are likely not eligible to make “catch up” contributions, so may be limited to the annual concessional limit of $27,500.

Centrelink entitlements – these need to be considered. If you, or your spouse, are receiving a benefit, e.g. the age pension, then converting funds in accumulation phase to Pension phase may impact these entitlements. This is one reason among many why you should seek advice before attempting this strategy.

The best way to get an idea of how the strategy works is with an example:

Sam is aged 60 and earns $100,000 per annum. His employer has contributed $10,000 to his Super this year (21/22) and each year prior since the 2018/19 financial year. His Super balance is $320,000. His expenditure requirements mean he does not have any additional money to contribute to Super and his savings are minimal.

With Hudson’s help Sam sets up a TTR Pension using $300,000, leaving $20,000 in his Super. He opts to receive an immediate pension payment for the maximum allowable from a TTR pension, which is 10%, i.e. $30,000. This lands in Sam’s bank account, ready to take advantage of the strategy.

What is Sam’s concessional contribution limit for the 21/22 financial year? Well the annual cap is $27,500 and the employer has already put in $10,000, so that leaves $17,500. BUT, Sam also has $15,000 unused from the previous three financial years (the limit was $25,000 and the employer only put in $10,000). This makes Sam’s allowable personal contribution limit a total of $62,500.

So, Sam can contribute the entire $30,000 pension payment as a tax-deductible personal concessional contribution.

The tax saving – Sam’s taxable income falls by $30,000 from $100,000 to $70,000 and he saves $10,350 in tax based on a 34.5% tax rate (32.5% income tax+2% medicare). The $30,000 that goes into Super incurs “contributions tax” of 15% which is $4,500. As such, tax saving to Sam this year is a whopping $5,850.

Next financial year we can do it all over again. Sam will fall short of the $27,500 cap by $17,500 once again. He will also still have $32,500 to carry over from previous financial years, so total allowable $50,000. Another $30,000 contribution means another $5,850 tax saving.

Eventually Sam will run out of “catch up” amounts to carry over, but even by increasing his Super contributions from the $10,000 (employer) by another $17,500 personal contribution, this means a tax saving of $3,412 a year while he continues to work.

Between the age of 60 and 65 the potential tax saving for Sam might well be over $20,000.

Other factors might mean an even larger tax saving. These might be:

  • If Sam’s income were higher, or
  • if he perhaps sold a property and realised a large capital gain, or
  • if he was self-employed and perhaps hadn’t made any concessional contributions since 2018, or
  • all of the above.

If you think you might benefit from a TTR strategy contact Hudson today on 1800 804 296 to speak with an adviser.


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