By Graeme Colley
Executive Manager, SMSF Technical & Private Wealth
Once retirement arrives there’s little more to do when it comes to super, right? Wrong! Anyone retiring at 65 years of age may have a life expectancy of at least twenty more years1 so one needs to establish a plan to ensure funds last. Continued contributions are an option for those who qualify.
In this year’s Federal Budget the government has proposed to abolish the work test for non-deductible personal contributions from 1 July 2022. If this proposal is legislated, for anyone between 67 and 75 years old, there will be no requirement to meet the work test when making non-deductible personal contributions to super.
Superannuation contributions can be made by an employer for anyone working beyond 75 years old. The contributions are limited however, for purposes of the superannuation guarantee and those made under an industrial award.
There may be contribution limits for anyone who is at least 67 years old, but the fund’s investment decisions will still need to be made by the trustees no matter how old they are. After all, the trustees are responsible to act in the member’s best interests by investing appropriately and ensuring benefits are paid when they are due.
The investment decisions need to be in line with the fund’s investment strategy which must be reviewed annually to consider the investment risks, diversification, cash flows and insurance. The trustees are required to ensure investments comply with the superannuation legislation concerning lending, borrowing and investing with related parties.
The core purpose of superannuation is to ensure the amount accumulated will be used to partially or fully support a person’s needs in retirement and to reduce the need to rely on the age pension. However, there is no mandatory requirement for withdrawals to be made in a pre-determined pattern. The income earned by the fund, on investments that support a member’s accumulation account, are taxed at 15% less any franking credits.
If a member is receiving a pension from the fund there is a minimum annual amount that is required to be paid which is calculated based on the balance in the pension account and the person’s age. For anyone who is 75 years old the standard minimum is equal to 6% of the pension account balance on 1 July of the financial year. However, if the pension commenced or ceased during the year a pro rata pension amount is required to be paid. For the 2020/21 and 2021/22 financial years there is a 50% reduction in the standard rate of pension so that anyone 75 years old is required to receive a minimum pension equal to 3% of their account balance.
The main benefit of commencing a pension is that income earned on investments supporting the pension is tax exempt in the fund. Also, anyone over 60 in receipt of an account based pension will receive the amount tax free in their hands. The downside for some is that they may have sufficient private resources to provide their desired lifestyle and any pension may be more than the amount required to meet their daily living expenses.
There are no hard and fast rules when it comes to how much is withdrawn from super, with the exception that on your death it is compulsory for your dependants to become entitled to lump sums, pensions or a combination. So you can leave the amount that has been accumulated in super for as long as you like and it will continue to accumulate at tax concessional rates.
Leaving retirement savings in super for as long as possible may work up to a point. However, it may be worthwhile for a person or a couple to consider having some private investments held in their name as the earnings may be tax free depending on the available tax rates apply to them. A combination of superannuation and personal investments may turn out to provide a worthwhile tax outcome in combination rather than having all their eggs in one superannuation basket.
The Federal Budget gifted some good news to many but the best update for anyone between 67 and 75 was the proposal to abolish the work test for personal non-concessional and employer salary sacrifice contributions up until age 75. The work test will still be in place for anyone wishing to claim personal deductible concessional contributions.
- Making super contributions after age 75 may be severely limited;
- Downsizer contributions apply after age 65, for those who qualify, without the need to meet a work test and there is no upper age limit;
- The advantages of the tax benefits gained from investments held in super;
- A combination of super and investments held personally or in combination with a spouse may provide a better tax outcome if that is important;
- There is no compulsion to withdraw amounts from super but it is compulsory to have benefits withdrawn as lump sums or pensions on a member’s death. It is possible to leave super untouched unless it is required for health care or aged care expenses; and
- The Federal Government’s proposal to abolish the work test from 1 July 2022 will make it easier for personal non-concessional contributions to be made to super.