Not All Pensions Are Created Equal
Did you know that after the age of 60 there is no tax payable on pension withdrawals? This can lead to significant tax savings. But most people already know this fact. Few people, however, know that it may also be possible to establish a tax free pension prior to the age of 60 also. Here are some taxation tips which relate to pension withdrawals from superannuation. Take a look…
Taxation of Pension Withdrawals when aged over 60
As mentioned above, no tax is payable on pension withdrawals when you are over age 60.
Taxation of Pension Withdrawals when aged between 55 and 59
What most people forget, or at least, don’t understand, is that just because you are under the age of 60, it doesn’t necessarily mean that the full amount of your withdrawals will be taxed. You might have to pay tax on pension withdrawals if you are aged between 55 and 59, but generally speaking, your super benefit is consisted of two components, namely a taxable component and a tax free component. The taxable component is a super benefit that typically comes from concessional (pre-tax) contributions made by you or for you including Salary Sacrifice Contributions and Employer Contributions such as Superannuation Guarantee. On the other hand, the tax free component generally comes from Non-Concessional (after tax personal) Contributions made by you over time.
Any super withdrawals must be paid in the same proportion as the taxable and tax free components of a member’s interest in the super fund. This is known as the proportioning rule. Under the proportioning rule, the process to calculate tax payable on super withdrawals is shown in the following example:
Assume you have $500,000 super benefit made up as follows
Tax Free Component
Total Super Benefit
As your tax free proportion is 80% ($400,000/500,000) and the taxable percentage is 20% ($100,000/500,000). Based on the proportioning rule, if you are aged between 55 and 59, 80% of your pension will be tax free and the remaining 20% will be taxable.
Let’s assume you withdrawal the minimum pension of 4% (i.e. $20,000) annually on your super benefit. 80% of the withdrawn amount is tax free which amounts to $16,000, whereas 20% (i.e. $4,000) is taxable. But on top of that it is also important to understand that any taxable amount which is withdrawn will also receive a 15% tax offset on the taxable amount of the super withdrawn; this would further reduce your tax liability.
Assuming a marginal tax rate is 34.50%, based on the example above, you would be assessed for tax purposes only on the $4,000 taxable amount of super withdrawn at 34.50%. This would lead to a tax liability of $1,380. But because you withdrew this income from a superannuation pension account, you also receive a 15% Pension Tax Offset ($600) on the taxable portion. As such the tax required to be paid on the pension payment of $20,000 only amounts to $780 (i.e. $1,380 – 600).
The timing of pension withdrawals is important. But just as important is the structure of your pension i.e. the proportion of taxable and tax free amounts within your pension. If planned for carefully, you could find that the amount of pension you might have had to pay tax on could be reduced significantly and could even be reduced entirely to zero, regardless of whether you are over 59 or not.
If you would like to know more about how you can better position yourself to maximise your tax free benefits, contact United Global Capital today and speak with one of our financial strategists for a No Cost, No Obligation consultation on 03 8657 7640 or email email@example.com to learn how you can take advantage of the opportunities available to you.The information contained in this report is General in nature and has been prepared without taking into account your objectives, financial situation and needs.