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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Congratulations on your redundancy, a redundancy can be life changing from a financial perspective, especially when handled to maximise your entitlements. I’ve been the lucky recipient of a redundancy so know it can be a massive windfall financially.
My tips for your redundancy are:
- Read the fine print of the redundancy package carefully, understanding its intricacies may provide potential to significantly improve your final entitlements.
- Consider cancelling salary sacrifice arrangements, it’s a simple ‘trick’ that has potential to increase final entitlements. Redundancy entitlements are calculated on taxable income, so having taxable income as high as possible is often helpful to maximise entitlements. My final entitlements increased by almost 30 percent just by cancelling my salary sacrifice arrangements.
Now to your question…
As you’re 58 you’ve met your preservation age, therefore you’ve triggered a condition of release that would allow you to create a Transition to Retirement pension; so technically, yes, you can set up a pension fund.
While the difference in tax rates on ‘pension funds’ and super might sound attractive from a tax perspective, particularly when you’re talking about the difference in tax on earnings rates between a super and ‘pension fund’, it may not be to your best advantage to set up a ‘pension fund’ now or whether you add to your super.
A decision as to whether it’s to your advantage to implement a ‘pension fund’ would depend on a range of things, including your work habits after your redundancy. While you’ve indicated you aren’t planning on fully retiring, there are several points requiring clarification to be able to provide a more informed response.
Let’s start with these few things that could influence a decision as to whether or not you a ‘pension fund’ is the right thing for you. Things worth considering include, but aren’t restricted to:
- Your planned level of participation in the workforce ie full-time, part-time or casual
- Likely salary expectations from new employment arrangement
- Cost of living expenses post-redundancy
- Is debt retirement a factor
- Ages and dependency status of your beneficiaries
- Are you willing to be self-funding regardless of the impact on your wealth and lifestyle
- Is Centrelink a consideration if you can’t find work?
The tax efficiencies I believe you’re talking about in regard to a ‘pension fund’ become most effective after age 60. While you’re under 60 creating an income stream may not really work to your advantage from a tax perspective. This is primarily because income received from a ‘pension fund’ while under 60 is added to any other assessable income, which may cause you to creep into a higher tax bracket depending on your employment income.
Of course, while you’re under 60 you’d be eligible to a 15% tax-offset relating to the income from the income stream…but that won’t fully negate your tax liability on the income stream unless your assessable income is under the low-income tax offset threshold.
It's worth noting that automatically adding the proceeds of your redundancy to your existing super account may not be beneficial to your future beneficiaries either... Now you’re probably wondering what future beneficiaries have to do with your question, yet from a tax and estate planning perspective the age and dependency status of future beneficiaries can be an important factor in deciding how and where to place your funds.
It mightn’t seem important while you’re alive and well, yet it can make a significant difference to the beneficiaries of your Estate, depending on the age and dependency status of your future beneficiaries. Simply adding your redundancy proceeds to your current super could turn out to be financially detrimental to any adult children at the time of your passing. If your beneficiaries aren’t classed as financially dependent beneficiaries under SIS legislation, they could end up paying tax if they inherit your super or pension accounts.
From a planning perspective there are many more unknowns than knowns arising from your question, a definitive recommendation requires significantly more information than has been presented in your query. You’d benefit from seeking personal advice, where different scenarios can be modelled, to craft a solution tailored to your specific needs. If you see value in making informed decisions about your money and your future, make the effort to seek professional strategic advice.
I encourage you to not to take a ‘Doctor Google’ approach of self-diagnosis, please do yourself a favour and get informed advice. In the long run you’ll be glad you did.
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