RETIREES
"I've paid taxes all my working life - now I want to spend the rest of my life paying none" is a remark financial advisers hear continually from those nearing retirement. That's a somewhat unrealistic expectation because the government is well aware of the rapidly declining number of people in work compared to those who aren't. This is why there is now a plethora of other taxes such as FBT, CGT, gambling and sales tax and of course the vicious 43 cents a litre fuel tax which one economist described as a "GST in disguise".
So appreciate that while income tax, and often capital gains tax, can be eliminated or substantially reduced in retirement, they will still get you via the indirect taxes.
The premier investment vehicle for retirees is the allocated pension. It's so simple that many people over-complicate it and look for implications that just aren't there. An allocated pension fund is merely a superannuation fund that has changed purpose - instead of receiving contributions to feed a growing retirement balance, it now pays money out in the form of a pension. But, there is one major difference - once the pension starts, the fund goes from paying 15% per annum tax to paying no tax at all. Yes, you can keep a large sum in a tax free area.
There is a catch - for the fund to keep its tax-free status you have to be drawing a pension from it. This is not as big a drawback as you may think. That part of the pension that flows from undeducted contributions is tax free, and the rest enjoys a tax rebate of 15%. Therefore if you drew an allocated pension of $18 000, and had no other taxable income, you would have no tax to pay, because the rebate of 15% on the $18 000 is more than the tax payable on that yearly income.
The size of your pension must stay within set limits as the following simplified example indicates.
| Age |
Minimum pension |
Maximum pension |
| 60` |
5% of account balance |
11% of account balance |
| 65 |
6% |
12% |
| 70 |
7% |
15% |
| 75 |
9% |
23% |
Think about the implications of these figures. Imagine you had $300 000 in your fund, started your allocated pension when you were aged 60, and drew the minimum pension. Provided your fund earned at least 7% per annum you could go to age 74 before you started drawing on your capital. If you were a more educated investor, and managed to get 8% per annum on your funds, the balance would be $305 000 at age 80 if you withdrew only the minimum. This would be $33 000 a year then, if you increased your pension by 3% per annum.
How do you minimise tax if you have an extra large balance? Simple; after discussion with your adviser, make a hefty lump sum withdrawal and invest it in superannuation as a spouse's contribution. Then, instead of your having a huge sum in your own allocated fund, you and your spouse will have large sums in two individual funds. Because no tax deduction is claimed on the spouse's contribution the entire spouse's balance will start off as an undeducted contribution and all the spouse's pension will be tax free.
If there is an unused balance when you die, all the money left over goes to your estate.
Accumulating money is often a matter of using smart strategies. Consider taking your allocated pension as a single yearly sum payable in arrears. This means that there is a bigger balance in your fund on the day you start the pension and you have a larger sum working for you. In the example above, where the starting balance was $300 000, the earnings were 8%, and the annual pension was the minimum, the simple act of taking the pension annually in arrears means that the balance at age 80 would be $282 000 instead of $249 000. Better still you would enjoy a bigger pension. Between age 65 and 92 you would be able to withdraw a total of $962 000 instead of $895 000.
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