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Case Study: Retired & Preservation Age to 59


 
 
Preservation Age

Generally, you must reach preservation age before you can access your super. Use the following table to work out your preservation age.

Date of birth Preservation Age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 01 July 1964 60

 

 
 
Under 60 and Retired

Whilst it is true that commencing a Simple Account Based Pension (SABP) works best when you are aged above 60 (when Pension withdrawals are tax free), commencing an SABP can still be a worthwhile financial exercise producing valuable tax savings if you are aged between Preservation Age and 59 and are "Retired". This is because you pay no tax on your SMSF income and realized capital gains. Offsetting these tax savings is the tax that you pay on the Pension withdrawals from the SMSF. However you must consider that when you draw a Pension and are under 60, you are only taxed on the "Taxable" portion of your Super Benefit and also receive a 15% "Pension Rebate" on the "Taxable" portion of the Pension accessed. This means that you can generally take approximately $40,000 per year in Pension Income Tax Free even if you are under 60 where you earn no other income. Some tax may apply on income drawn above this amount. This can provide tax savings similar to, if not equal to commencing a Pension after age 60.

 
 
Case Study Example

Let's consider a Case Study demonstrating how much tax you can save by commencing a Simple Account Based Pension between Preservation Age and 59 when you are "Retired".

Example:

Barney is 58 and has recently "Retired".  Barney has a Super benefit of $1,000,000.  His Super Benefit is broken down into a "Taxable Component" of $800,000 (built up from Employer Contributions) and a Tax Free Component of $200,000 (built up from Personal Non Concessional Contributions).  This means that 80% ($800,000 / $1,000,000) of Barney's Super Benefit is Taxable and $20% ($200,000 / $1,000,000) is Tax Free. 

Barney commences a Simple Account Based Pension on 1 July, 2017 and he is still within his Transfer Balance Cap. This is the appropriate Pension to commence given that Barney is "Retired". Barney must access 4% of his Super Benefit as a Pension, that is $40,000. The Tax Free portion of the Pension Income is 20% (i.e. $8,000) and the Taxable portion of the Pension Income is 80% (i.e. $32,000).

Barney has no other Taxable Income given he has "Retired".  The SMSF has generated a Taxable Income of $60,000 made up of taxable interest and dividend income and realised capital gains from the sale of shares during the financial year.  Franking Credits on the dividend income Barney total $10,000.

 
 
Case Study Result

Tax Result in SMSF With SABP No SABP
SMSF Income $60,000 $60,000
Dividend Gross Up $10,000 $10,000
Total Income $70,000 $70,000
Tax on SMSF Income $0 ($10,500)
Franking Rebate $10,000 $10,000
SMSF Tax Refund / (Payable) $10,000 ($500)

 

Tax Position in Personal Name With SABP No SABP
Taxable Pension Income $32,000 $0
Tax Payable ($3,262) $0
Low Income Tax Rebate $445 $0
Pension Rebate $4,800 $0
Personal Tax Refund / (Payable) $0 $0

 

Overall Tax Result With SABP No SABP
SMSF Tax Refund / (Payable) $10,000 ($500)
Personal Tax Refund / (Payable) $0 $0
TOTAL Tax Refund / (Payable) $10,000 ($500)

 

 
 
Case Study Result

As the above example demonstrates commencing a Simple Account Based Pension between Preservation Age and 59 has saved Barney $10,500 in tax. This is an annual tax savings and demonstrates the taxation savings available by commencing a Simple Account Based Pension before age 60! In fact in the above example the tax saving is exactly the same as if Barney had commenced a Simple Account Based Pension after 60 because after applying taxation concessions, Barney actually pays no tax on his Pension of $40,000 even though it is taxable!

 
 
Apply Now

To establish a Simple Account Based Pension simply visit our Online Application Form here.