29 – Start a private pension

Introduction: transition to retirement pensions

Some years ago the Government changed the rules for paying super benefits to allow private pensions to start at age 55 without retirement. The Government was concerned some workers were retiring at age 55, using up their super, and then falling into the public pension/Centrelink system for the rest of their lives.

This was a lose/lose/lose scenario. The worker lost financially, society lost a productive worker and the Government lost taxes and had to pay out Centrelink benefits.

The solution was a good one. Allow workers to start to retire at age 55 and start to draw down their super, with a limit of about 4% a year. Everyone wins. The worker earns more, accumulates more and probably enjoys better health. Society keeps a productive worker. The Government gains taxes and pays out less Centrelink benefits.

The tax analysis

Once the pension starts the investment earnings on the benefits used to pay the pension become tax free in the fund’s hands. This means the member gets a bigger credit to their account each year: there is no more tax on investment earnings.

The tax treatment of the pension income  in the member’s hands depends on the member’s age:

(i)  at age 55 the income is assessable, but subject to a 15% pension tax offset and

(ii)  at age 60 the income is tax free.

This means for your clients aged 55 to age 60 you should do a cost/benefit analysis on whether the tax saving is worth the extra cost and trouble of starting a pension, but for clients age 60 its a done deal: virtually every client should start a private pension at age 60.

Further contributions

The ATO accepts that clients can continue to pay concessional contributions once the pension starts. This means some clients can pick up tax benefits connected to super contributions, while being effectively nil out of pocket, because they are receiving a tax free pension.

Further reading

Trish Power has a great super website, www.superguide.com.au, and it includes some great further reading on how private pensions work. One of them is Ten Interesting Facts About Transition  to Retirement Pensions and we recommend you read this article closely rather than have us reinvent a  wheel here.

ASIC case study

ASIC has a transition to retirement pension case study on on its Smart Money website and you can read it here: ASIC pension case study.

Practice tip

Create a PDF version of this page, including its hypertext links, and send it to every client who is over or approaching age 55, and every potential client who is over or approaching age 55 (which when you think about it is every client or potential client). Invite them into a complimentary meeting to discuss whether a private pension works for them.

Invite them to send a copy of your e-mail and the PDF to their friends and colleagues and repeat the offer of a complimentary meeting.

Never let a fee note get in the way of a client meeting, and remember the time frame for every client relationship is 30 years not 30 days.

The Dover Group