Easy steps to maximising income in retirement

Australian Financial Review

10 July 2017

Ben Smythe

For a number of self-managed superannuation fund (SMSF) members drawing a private pension, July 1 signalled a need to revisit old budget spreadsheets and work out how best to fund ongoing living expenses.

With a $1.6 million cap on a tax-free super pension, some might find that their pension income falls from last year’s levels and they will need to consider assets in an accumulation account or in their personal name to make up the shortfall.

It is important that members revisit any pre-existing automatic pension payments now as they may no longer wish to keep drawing the same amount. Given that many SMSF pensions will have been reduced to meet the $1.6 million pension limit, the pension minimum will also need to be reduced.

To fund any income shortfall from the tax-free pension, there are three main options. Retirees can draw a higher amount from their super pension, take lump sums from the accumulation account or use personal assets – or a combination of all three.

Given the assets that remain in a super pension remain tax-free and the $1.6 million balance transfer cap is allowed to increase with earnings, it would make sense to wind back the minimum pension payment where possible in an effort to preserve as much capital as possible.

This will particularly be the case if the majority of the “tax-free member component” is sitting in the pension account. This is important because when a pension is in place, the tax-free and taxable components are fixed for the life of the pension. Regardless of whether the value of the pension rises or falls, the tax-free and taxable components remain the same.

This is not the case with an accumulation balance, where earnings increase the taxable component, and by implication will reduce any existing tax-free component.

The benefit of maintaining as high a tax-free component as possible is that it will reduce the tax bill on a death benefit bequeathed to an adult child. It will also possibly provide some protection against regulatory risk, which is obviously prevalent when it comes to super in Australia.

Where retirees are looking to draw the minimum from their SMSF pension, should they make up any cash-flow shortfall from their accumulation account or personal assets?

This will come down to tax, assuming that the superannuant has reached preservation age and has full access to their super savings.

In their personal name, savers can retain investable assets without paying tax up to a certain threshold – currently $18,200 per person. When franking credits are added, this could be a reasonable asset base depending on the income return.

For most people, once they withdraw money from super they can’t get it back in unless they meet the so-called work test if they are over the age of 65.

The combination of only being able to transfer $1.6 million into a private pension and the rise in minimum drawdown rates with age, means the reality is that a number of SMSF members will start to build a reasonable asset base in their personal name.

But if retirees are generating more than the minimum income threshold and so are paying tax in their own name, it would make sense to run down these assets before withdrawing money from a super accumulation balance.

Clearly a myriad of issues are emerging from the super changes that came into place on July 1. Rejigging portfolios in order to meet ongoing living expense in retirement is more than likely not an issue that many SMSF members have considered. Yet!

Ben Smythe is the managing director of Smythe Financial Management