In the previous podcast we discussed ‘bolting it all together’ while you are still working – meaning getting everything in order financially before you retire. We gave the example of a couple who earn $90,000 each in the final 10 years of their working lives, and their ability to claim $113, 505 in personal tax returns if they make voluntary super contributions in that time. If we subtract the 15% earnings tax from this, it would leave a benefit of $64,155. There are other benefits the couple could tap into while they are working, such as spouse contribution and government co-contribution. There are many small things you can do while you work to chip away at growing a larger amount of money for your retirement.
We recently had a meeting with a couple who had just retired, and whom we helped set up their super income streams. Then, when the husband reached retirement age, we met with them again as he now qualified for the age pension. Before this benefit is paid out, though, Centrelink does an assets test to determine whether someone is eligible or not. The couple had $1 million in their super – however, as his wife was still under retirement age, the money in her account would not be considered an asset, and her husband would be able to get the age pension which would be $17,000 a year for him. He is eligible to receive it for 2 years after which time his wife would also be of retirement age. To achieve this, we had to move her money back to a standard superannuation fund. Even though her money will now be taxed at 15% instead of 0%, the maximum she’ll pay is $3,500 a year, but her husband will be getting $34,000 over those two years – highly outweighing her costs in tax.
Moving the money back to a super fund is legal – don’t worry!
So, what is a super income stream? It’s an account you can move your money into once you retire, which is taxed at 0%. They can also be called account based pensions (listen to Episode 57 for more information about account based pensions). If you can build up enough money in your super to be able to draw $90,000 a year every year for 30 years (the average approximate time in retirement) from that income stream, you will be paying no tax on any of that money. Drawing an income from a zero-tax account would save around $900,000 in tax for someone who earned $100,000 a year. If they were paying income tax on the money, they would really only be earning $70,000 as approximately $30,000 a year would go to tax. If you multiply that by 30 years, that gives you a saving of $900,000. Not a bad number. Of course, in order to draw that $90,000 you need to build up enough money in the first place to generate that rate of return.
And finally, the end. No-one wants to think about dying – but everyone does. At the end of the day, what you do want to think about is where your money will go after that. We’d put money on the fact that everyone would say they want their leftover money to go to their spouse, their kids, their family – not the ATO. If we are looking at couples – when the first person passes away, their super goes to their spouse, who in this case is known as the ‘tax dependent’. They get it tax free. But once the spouse dies, if the money in super goes to their kids, they’re classified as ‘non-dependent’ for tax purposes. And they’ll pay about 17% in inheritance tax. Many people don’t know about this – for some, it’s not reported on your statement – but there’s actually a tax-free component to your super balance, and there’s also a taxable portion. These sub-balances could be anywhere between 0-100% of your super balance. If someone had a million dollars in super and half was in the tax-free sub-balance with the other half in the taxable sub-balance, on the death of the second spouse, the kids would get half of it tax-free but would have to pay 17% tax on the other half. Naturally, we want to minimise the overall taxable amount. There are different strategies we can use earlier on while clients are still working. Have a listen to Episode 39 – How to Minimise Your 17% Inheritance Tax to find out how to get as much as possible into the tax-free portion.
Another tip is for the retiree to spend the taxable portion of their retirement savings first. Of course, you can’t simply choose which sub-balance your withdrawal comes from; you need 2 separate accounts. Nor do you have the choice which sub-balance the money goes into. Basically, the way it works is money from your employer and any voluntary contributions you make go into the taxable sub-balance. Money from assets (such as the sale of a house) goes into the non-taxable portion.
As always, we are here to discuss these tips with you if you need. You can send your questions to email@example.com or call 07 4772 0938 to make an appointment with us.
Dallas Davison, Michael Hogue and Ali Hogue.