Can I set up a pension fund for my retirement? I am getting a voluntary redundancy payment and would like to know if putting it in a pension fund or adding it to my super fund is best for tax purposes. I am 58 and I don't plan to fully retire after I am made redundant.
Andrew - Keilor, Vic
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Great to see you are looking at ways to maximise your retirement. The correct strategies now, can make all the difference in 5 – 10 years’ time.
Firstly, it is important to distinguish between the Pension and Accumulation phase. The big difference between the two is the tax treatment. Accumulation funds attract a tax rate of 15% on both the concessional (before tax) contributions and the earnings. Funds invested in Pension phase, are exempt from tax. Obviously in most cases, it is best to maximise the time we spend in Pension phase however, in order to access the pension phase your benefits must satisfy what the government calls ‘preservation rules’.
To move your retirement savings into Pension phase, the funds must be classified as unrestricted and non-preserved. This is the technical wording meaning, you have satisfied a condition of release, and there is nothing stopping you from accessing your retirement funds. The conditions of release are:
- You have reached the age of 65
- You have reached the preservation age (see below) and permanently retired
- You have ceased employment after age 60 or
- You are permanently incapacitated
Andrew based on your age, you fall into the transition period, so whether you have reached preservation age will be based on the month of your birth.
Born Between July 1963 - June 1964 your Preservation age is 59
Born Between July 1962 - June 1963 your Preservation age is 58
Based on the fact you plan to continue working, and that you have not turned 60, it is unlikely you will satisfy this condition of release. If you did not have plans to return to work, you could potentially have the option to roll your super into pension phase.
Regarding putting the money into super, you are not permitted to roll a redundancy payment into superannuation however you can contribute the funds through the normal contribution channels.
You can contribute up to $25,000 p/a as a concessional contribution. This type of contribution can be claimed on your tax return; however, your super fund will deduct 15% tax on the money you put into the fund. You should be aware of your current Super Guarantee (SG) contributions as any amount over your $25,000 cap will count toward your non-concessional cap.
You also have the option to utilise a non-concessional contribution. You are not able to claim these contributions, however there is no further tax payable when you put the money into your super. The maximum amount in any given financial year is $100,000. In the event you exceed this amount, you will trigger a ‘bring forward rule’. This will mean you can contribute 3-years’ worth of contribution caps ($300,000).
Without knowing more about your tax situation, it is hard to give a definitive answer, which style is more tax effective, as this depends on:
- Your taxable income
- The size of the redundancy payout
- Whether you have used all your concessional caps in the prior financial years.
It would be worthwhile seeking advice from a licensed tax Financial Adviser or potentially your accountant. Generally speaking funds invested inside superannuation have a maximum tax rate of 15%; so you would need to consider what your personal tax rate is to compare whether it is worthwhile contributing the money into super, or investing it outside.
If you have reached preservation age, you are able to setup what is called a ‘transition to retirement’(TTR) pension. This means you can receive a regular income stream from your super, whilst you continue to work. The funds continue to be taxed at 15% inside the fund. A common strategy is to salary sacrifice a larger portion of your income into super, whilst receiving a tax-free income stream from your super. Before commencing a strategy such as this it is important to have a professional review your situation, as this strategy is not beneficial for everyone.
If you do not require access to the funds at the present time, you can hold off on setting up a pension until you meet one of the conditions of release and enter pension phase. At this time, you can opt for either a regular income stream or using a lump sum.
Whatever happens, its good to see you being rewarded for your years of service and wish you all the best.
Regards, Luke Harlow
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