Best time to open pension account

If you are considering retirement in the near future, you should investigate opening a retirement phase pension (RPP) account as an offshoot to your regular superannuation fund in order to boost savings and minimise tax.

Once you have reached preservation age, which can range from 55 to 58 years of age, depending on when you were born, it is worth seeking financial advice on how an RPP will benefit you.

Generally, any interest earned on the money in a retirement phase account will not be taxed.

That is a considerable advantage over the 15 per cent tax applied to earnings in your regular accumulation phase account.

There are a couple of rules that must be followed. The main one is that you cannot, for the next two years, have more than $1.6 million in a retirement phase account. That is what is known as the transfer balance cap. Beyond that period, the cap will be indexed and the total balance will likely vary upwards.

Second, you need to draw down an income from the retirement phase account and it must be at least equal to the Government’s prescribed minimum, based on your account balance, according to super fund Australian Unity.

Only 50 per cent of any income stream over $100,000 is taxed and the rate applied will be your marginal rate. And there is no tax payable when you transfer money from your accumulation account into the RPP, as long as you are 60.

By way of example, Australian Unity explains: “Let’s say Jack, aged 60, has $500,000 invested in an RPP. He is married to Jenna, who has her own retirement investments. Jack’s RPP generates tax-free earnings at, say, eight per cent, which equals $40,000 in year one. If Jack draws an income of $33,000 (indexed at three per cent per annum), he will pay no tax on that. His account balance at the start of the following year will therefore be $507,000.

“In 10 years’ time, Jack’s account balance will be $541,310, with earnings of $43,305. His income will be $43,058, and this will be tax-free. Over those 10 years, tax-free earnings in the fund would total $419,865, and the total tax-free income Jack would draw would be $378,308. Plus, Jack would still have an account balance of $541,310.

“Because Jack has been taking less than the fund earns each year, the account balance has actually grown over the first 10 years. If he takes the indexed pension, his balance will eventually decline, but he will still have $286,137 in the account by age 85 and will receive a tax-free pension payment of $69,095 in that year.”

RPPs are assessed under the assets test by Centrelink and are subject to deeming rules, which may disqualify some retirees from receiving the full Age Pension.

However, there are also many advantages to these pension offers. Ask your super fund and financial adviser to explain how RPPs can:

  • be highly tax effective
  • make estate planning easier
  • help you increase Age Pension benefit
  • make it easy to withdraw some or all of your capital
  • be invested in a wide range of assets.

Can you think of any other advantages or disadvantages to opening a retirement phase pension account before you finish working altogether? 

Related articles:
Superannuation rules change
Super funds cheating you
Move to cap super fees

Disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.

Written by Olga Galacho


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