Tax Free SMSF even if you're working at 55 If you are still working after you turn 55 years of age it is possible to convert your SMSF to a Simple Account Based Pension and enjoy a 0% tax rate on your SMSF earnings and capital growth. This type of Simple Account Based Pension is called a Transition to Retirement Simple Account Based Pension. If you are over 55 and have retired then this type of Simple Account Based Pension is not available and you would simply start a normal Simple Account Based Pension in this case.
Summary of Benefits
A summary of the benefits of implementing a "Transition to Retirement" Simple Account Based Pension are detailed below::
> The tax rate of your SMSF reduces to NIL
> You never have to pay tax on your investments earnings in the Fund
> You never have to pay tax on your investments capital growth in the Fund
> You receive a cheque from the ATO each year equal to any franking credits received by your SMSF
> You pay some tax on the pension payments if aged between 55 & 59 but no tax after 60
> You are not permitted to make Lump Sum Withdrawals from a Transition to Retirement Simple Account Based Pension. However when you retire you can convert to a standard Simple Account Based Pension at which time you can access Lump Sums.
Transition to Retirement Strategy incorporating a Salary Sacrifice Strategy
The effectiveness of this strategy is magnified when you incorporate a salary sacrifice strategy. This basically means that you salary sacrifice as much of your income as you can afford on one hand and on the other you receive a pension income stream from your SMSF to help fund your living costs. You can think of it as a "round robin" strategy where the money that is salary sacrificed is channeled back to you as a pension payment but in the process saving you thousands of tax dollars.
Transition to Retirement Strategy allows you to maximize Salary Sacrifice Benefits
The major problem with salary sacrifice is that it considerably reduces the income you have to live on. With a transition to retirement strategy this is somewhat mitigated as you can pay yourself a pension income from your Fund softening the cashflow burden. Importantly this maximizes the amount you can afford to salary sacrifice maximizing your tax savings leading up to retirement and giving you more in super benefits when you retire.
How much Tax can I Save
After the age of 60 this is truly a remarkable tax saving strategy when combined with a Salary Sacrifice Strategy because all pension payments are tax free after 60. This is because you save tax at 2 levels. The first is that you pay less tax on the salary you sacrifice. The second is that you pay no tax on your SMSF investment income and capital growth. Importantly there is no tax payable on the Simple Account Based Pension you draw from the SMSF to offset the tax gains.
Whilst it is true that commencing a Transition to Retirement Strategy in combination with a Salary Sacrifice Strategy works best whilst you are working and are above 60 (when pension payments to you are tax free) it can still be a worthwhile financial exercise producing valuable tax savings if you are aged between 55 and 59. This is because you continue save tax at 2 levels as detailed above. However offsetting these tax gains is the tax that you pay on the Simple Account Based Pension you draw from the SMSF (which we note is concessionally taxed and receives a 15% rebate). Overall the benefits can still be significant.
Let's Consider an Example
- Say you are over 55, on a salary of $120,000 and have $1.0 million in super earning 4% pa in fully franked dividend income
- You salary sacrifice the maximum you can, namely $100,000
- You commence a Transition to Retirement Strategy drawing the minimum you require to live off, say $50,000
- The tax rate of your SMSF drops to NIL
Tax Saving
The tax savings adopting this strategy are as follows:
Tax Saving from Strategy
Aged 55 - 59
Aged above 60
- Tax Savings on Salary
$33,400
$33,400
- Tax Payable on Simple Account Based Pension
($6,150)
$0
- Tax Payable on Salary Sacrificed Super
($15,000)
($15,000)
- Tax Savings on SMSF Earnings
$6,000
$6,000
- Total Tax Savings
$18,250
$24,400
As the above demonstrates there is a significant tax advantage in adopting this strategy even before the age of 60.
* Calculations above are based using the 2009 Income Tax Rates.
Commencing a Transition to Retirement Simple Account Based Pension
When you are ready to commence a Transition to Retirement Simple Account Based Pension ESUPERFUND will attend to all aspects of the Simple Account Based Pension setup process for you. You do nothing.
Free Setup
It is FREE to establish a establish a Transition to Retirement Simple Account Based Pension.
Apply Now
To establish a Transition to Retirement Simple Account Based Pension (appropriate if you are over 55 and working) simply visit our Online Application Form here.
General Advice Warning
The contents of this website are of a general nature only and have not been prepared to take into account any particular investor's objectives, financial situation or particular needs. Where this publication refers to a particular financial product then you should obtain a Product Disclosure Statement (PDS) relating to that product and consider the PDS before making any decision about whether to acquire the product. We also recommend that you should seek professional advice from a financial adviser before making any decision to purchase any financial product referred to on this website. While the sources for the material are considered reliable, responsibility is not accepted for any inaccuracies, errors or omissions.