Expert advice on how to make your funds go further
Your account-based pension is taxable if you are under 60 but it gets better treatment than ordinary income. Part of it may be tax free, if some of the money in the fund is derived from non-concessional super contributions and the balance receives a 15 per cent tax rebate.
Let’s imagine Jane, aged 58 has $500,000 in her account-based pension fund, which includes $250,000 non-taxable component due to non-concessional contributions.
Jane draws an initial pension of $40,000 a year (eight per cent of the balance of her fund). Because the taxable portion is 50 per cent of the balance, 50 per cent of the pension ($20,000) will be tax free. The balance of $20,000 a year will be taxable, less a 15 per cent rebate, which is equal to $3000.
If Jane had no other income, the rebate would wipe out all her tax and she would have the best of both worlds. The money would be held in a tax-free environment and she would enjoy a tax-free income from it. Note that if the fund earned better than eight per cent for the year, Jane would finish the year with more than she started with in her account-based pension fund account, and enjoy a tax-free pension.
Of course, once you reach 60, all withdrawals from superannuation are tax free. If you convert the fund to an account-based pension fund it will be a tax-free fund, but you will be required to make at least the minimum withdrawals from it; leave it as super and your fund will continue to pay the normal 15 per cent income tax, but there will be no requirements to withdraw any money from it.
This article is an extract from Superannuation Made Simple, Noel Whittaker’s guide to all things superannuation.