Most people aren’t aware of the fact that their superannuation fund has an earnings tax rate of 15% applied to the income. For example, if you have $500,000 in super, and have investment earnings of 5%, you will have to pay tax of $3,750 (15% x $25,000). This happens ‘behind the scenes’ and is automatically deducted by your superannuation fund.
However, once you meet a condition of release you are able to move from Superannuation to an Account Based Pension. One of the main advantages of this change, is that an Account Based Pension has an earnings tax rate of 0%. While the most common condition of release is full retirement from work, ceasing any job after the age of 60 also fits the bill.
In the example above, this would mean you pay no tax on the investment earnings. Not only does this mean you would save the $3,750 in the first year, but this saving is retained each year, and can compound over time to make a significant difference to your retirement savings. This is effectively ‘money for nothing’, given that these extra savings are achieved without making any changes to your investment strategy or contributing any more of your income.
The other major change to be aware of when moving to an Account Based Pension is that you are able to draw an income from this account. If you are over aged 60, this income is received tax free. In some cases, this could be contributed back into superannuation as a concessional contribution, which can also reduce the amount of income tax you would have to pay.
If you are over aged 60, and have had a change of employment, a combination of these two strategies (minimising earnings tax, and minimising income tax), can make a huge difference over the remainder of your working life.
Written by Dallas Davison.
Dallas Davison, Michael Hogue and Ali Hogue.