24 – Start a transition to retirement pension

Meet Liz, aged over 60

Elizabeth is a new Dover adviser. She had previously been licensed by a bank AFSL, specialising in bank products rather than financial strategies.

Elizabeth felt her age had worked against her in that corporate environment. She was probably right. But the good news was her age would work for her as a newly self-employed financial planner. Advisers need grey hair. Clients want wrinkles. Experience and wisdom are a good look for financial planners. You have to have life experience to provide real financial advice.

Elizabeth looked young. I was surprised to hear she was actually 61. I was even more surprised to hear she had not started her own transition to retirement pension at age 60. The bank training program never mentioned it, she flustered.

The best time to start a transition to retirement pension is age 60. The next best time is today.

The transition to retirement pension was a great way for Elizabeth to access cash flow for living while she built up her new practice. It takes a while for the client cash to flow. It’s the same for every new small business.

Every client should start a transition to retirement pension at age 60, or as soon as possible thereafter. There are very few exceptions. The investment earnings in the super fund become tax free, and the pension payments are tax free in the client’s hands. Its a no brainer. You should routinely recommend clients age 60 start or continue transition to retirement pensions.

There is a tax saving equal to the tax that would have been paid but for the pension. If the fund has a taxable investment earnings of say $30,000, this means there is a $4,500 tax saving every year.

The pension payments will usually be about 4%. Most clients will be able to re-contribute this amount, and more. This can be done using concessional contributions or even non-concessional contributions (subject to the usual restrictions on who can contribute, and how much, and when).

What if your client is age 55 to 60?

Here the transition to retirement pension is available, but for most will not be a tax viable proposition. This is because the pension income is taxed in the member’s hands, albeit with a 15% rebate. When you run the maths the tax charge experienced by the member will usually more than outweigh the tax benefit connected to the SMSF’s investment income becoming tax free. But not always. So you need to test it every year. Likely exceptions occur when there is a large taxable capital gain or other assessable amount in the SMSF (but it has to be large because the tax charge is usually only 10% on capital gains and 15% on other income) and/or the client has a low taxable income, or tax losses.

Some clients between age 55 to 60 may want to start the pension for non-tax reasons. They may simply want to cut back their working hours to say half time, and then draw on a part pension to compensate for their lost income.

Further reading

The ATO accepts re-contribution strategies. You can read an article by Aaron Dunn explaining re-contribution strategies and the circumstances where they are most effective here: SMSF Review article on re-contribution strategies.

You can read a BT information sheet on transition to retirement pensions here: Transition to retirement information sheet.

The Dover Group