This is a technical financial advice topic and general advice only. So, to help make it easier we offer an obligation free chat to discuss whether this strategy would be right for you.
Case Study:
In this example, let's assume a couple both have $1.4m in their superannuation accounts each. Their funds have been built up via pre-tax contributions (including employer and salary sacrifice contributions) and investment returns only. This means their whole account balance is made up of a taxable component. Without any intervention, if they passed away and their adult children who are non-tax dependents inherit the super accounts, their beneficiaries would lose $238,000 in tax per account. That's nearly half a million dollars combined leaving the family!
However, with a carefully planned strategy of withdrawals and tax free contributions across 15 years, it is possible to reduce this tax down to just $41,149 per account! The numbers are show below:
If you have read the article and have any questions or you are confused, don't worry this personalised advice is our specialty and we will make the complex simple for you to understand!
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Other Considerations of Strategy/Case Study:
This strategy can only be enacted from age 60 if you are fully retired, otherwise it is age 65. Therefore from age 65, it may only be possible to do 3 or 4 'stages' rather than up to 6.
This strategy requires the establishment of an account based pension. It should not be implemented in an accumulation account to limit potential capital gains tax issues.
If you have wealth outside of superannuation such as cash savings, shares etc, it could be preferrable to contribute those funds into superannuation rather than using up non-concessional contribution caps purely just to minimise non-dependant tax. A cost benefit analysis would be calculated by us in this area.
Technically it is possible to reduce down the taxable component further than what I have highlighted by having separate accounts whereby tax free contributions are quarantined. As you can see above, by having just one pension account, the tax free component percentage increase actually decelerates per stage. Having separate accounts allows a greater tax free component increase. However again, a cost benefit analysis needs to be calculated as to whether the tax benefit outweighs the potential extra cost of running multiple accounts. For clients with SMSFs, it is worthwhile seeking advice from us to discuss account segregation options for this strategy.
It is sometimes possible for Advisers to recommend withdrawing the total balance from pension phase to eliminate all tax to non-tax beneficiaries. This can occur for instance when a persons health deteriorates quickly. However, again a cost benefit analysis needs to be conducted by us to determine whether the benefit of paying less non-dependent tax will outweigh the potential risk that the withdrawal triggers income tax if the investment proceeds generate income above the tax free threshold for seniors.
Contributions have both dollar based and age limits so it is very important to make sure these are exercised correctly to take advantage of the strategies correctly.
In this scenario, we have assumed both clients live off the investment returns to fund their retirement expenses, so the account balance in each account stays healthy at $1.4m throughout retirement.
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