Pension Refresh Strategy
A pension refresh strategy involves commuting an existing pension back to accumulation phase and commencing a new pension to include contributions accumulated since the original pension was initially established. They can be done at any stage throughout the financial year. Starting a pension does not prohibit a person from continuing to make or receive contributions to super. However, contributions are unable to be made to a pension account, rather, can only be made to an accumulation account.
The following are some reasons why a pension refresh might be beneficial:
- Tax – Tax on earnings in accumulation phase is 15% compared to 0% in account-based pension. Implementing a pension refresh strategy can ensure all retirement savings are in tax free pension phase, eliminating all earnings tax.
- Tax – Recontributing funds into a new pension can improve the tax-free proportion of the pension. This is generally only beneficial for individuals over 60 with a high taxable component in their pension account. The way this works is that the funds are withdrawn from the pension account and is recontributed to super as a non-concessional contribution, which forms part of the tax-free component in super. The pension is then refreshed to pick up the contributions made into the accumulation balance, effectively increasing the tax-free proportion of the pension. Increasing the tax-free component of a pension can have benefits, including reducing potential death benefits tax and protection against changes in legislation.
- Consolidation – Consolidating all retirement savings into one account can reduce costs such as administration costs and member fees.
- Investment strategy – Having all retirement savings in one account can allow for a more focused and easier to manage investment strategy
- Fully retired – If an individual is expecting to be fully retired and is no longer making further contributions, it is better to have all the funds in pension phase.
- A pension refresh may also be particularly useful for individuals who continue working and continue to receive superannuation contributions after they have commenced receiving a pension.
Warnings
- Depending on the superannuation structure and the specific super fund, occasionally, assets must be sold down and rebought in the pension refresh process. This is more likely for investments that are structured by the superfunds, rather than member directed investments (e.g direct shares, ETFs), however this varies from superfund to superfund.
- Be mindful of the Transfer Balance Cap, which allows no more than $1.5 million to be transferred into an account-based pension. Exceeding the Transfer Balance Cap can result in excess transfer balance tax on notional earnings.
Please speak to a financial adviser if you believe a pension refresh strategy may be suitable for you.