If you are nearing or in retirement you may wish to become acquainted with various strategies that may help to ensure that your pension outlives you. If you would like to learn more about whether a pension refresh strategy could benefit you, keep reading.
What is an account-based pension?
An account-based pension enables retirees to receive regular payments from their super while that money remains invested. It offers retirees a tax-effective, regular, and flexible income using the money that has been allocated to super throughout their working life. Pension payments within a financial year must amount to the minimum withdrawal threshold, however, there is no maximum for withdrawals, and therefore provides retirees with flexibility as their circumstances change.
Depending on the platform your account-based pension is invested, these payments can generally be made on a fortnightly, monthly, quarterly, half-yearly or annual basis contingent on your expenses and what suits you. These pension payments are tax-free if you are 60 or older and retired, investments earnings are also tax-free and additional lump sums can be withdrawn when required. However, It should be noted that the account balance of an account-based pension will fluctuate in line with market conditions and therefore retirees need to consider whether this is suitable for them.
What is a pension refresh?
A pension refresh is a strategy that involves converting an existing pension back to the accumulation phase and commencing a new pension which includes the contributions that have accumulated since the original pension was first established. This can take place at any stage throughout a financial year.
Beginning a superannuation account again does not mean that individuals are prevented from receiving pension payments or making contributions to super at the same time. The contributions that are made, however, cannot be into the pension account. Thus, if an individual wishes to continue making contributions once they have started a pension, it may be a viable option to have both a pension and super account open simultaneously and follow a pension-refresh strategy.
What is the process of conducting a pension refresh?
The process involves converting a pension back into the accumulation phase and then commencing a new pension which includes any new contributions. This is where a financial adviser can assist in the lead-up to retirement and provide advice to pre-retirees and retirees on the most appropriate ways to structure their assets to ensure they are financially supported and stable throughout their retirement. A survey conducted by Challenger found that retirees who engaged with a financial adviser were 14% more likely to be confident or very confident in their ability to live a comfortable retirement.
What are the benefits of a pension refresh strategy?
There are several benefits associated with this strategy that may be beneficial for those transitioning to or in retirement.
It is important to consider the tax implications both before and in retirement as this can have a significant impact on how much money you receive in your pocket. Tax on earnings in the accumulation phase is taxed at 15%. There is 0% tax payable on earnings generated within account-based pensions and therefore implementing a pension refresh strategy may offer considerable tax benefits to many retirees. In addition to this, re-contributing funds in the accumulation phase can also increase the tax-free proportion of an account-based pension. This involves withdrawing funds from the account-based pension which are recontributed to the super account in the accumulation phase as a non-concessional contribution. When the pension is refreshed, it includes the contributions made during the accumulation phase and increases the tax-free proportion of the pension.
Another benefit of this strategy is that it consolidates all retirement savings into one place. This can help to reduce administrative costs and member fees if individuals have money in multiple accounts across multiple platforms. This is an important consideration for retirees, as costs and fees are one of the controllable variables when investing in the market.
Another advantage of having all retirement savings in one place, is that it enables a more focused investment strategy to be implemented as retirees or their financial advisers have an accurate and clear understanding of the funds they have access to. It is also beneficial for those individuals who wish to receive regular income from their pension but will continue working and wish to make superannuation contributions simultaneously.
Warnings and Risks
One risk would be to ensure that any additional contributions made while the account is in the superannuation phase are eligible to be received. In other words, it is important to check the relevant balance caps and previous-year contributions as well as your age when making the contributions.
Another consideration is the Transfer Balance Cap which prevents balances of more than $1.7 million from being transferred into an account-based pension. If the cap is exceeded, the excess transfer balance will need to be transferred back into the accumulation phase within a six-month period. Any notional earnings generated whilst this excess amount is in the pension phase are taxed at 15%.
If you are nearing retirement and would like tailored financial advice to help you feel more confident as you near retirement and to ensure your pension outlasts you, please click here to organise a complimentary 20-minute consultation with an EPG Wealth adviser.