People entering retirement need more help than a ‘transition to retirement’ strategy; they need help to reassess their ongoing approach to superannuation and their changing income needs from superannuation savings during the rest of their lifetime, says Mr Michael Hutton, wealth management partner at HLB Mann Judd Sydney.
“It is clear many people do not appreciate what they can do with their superannuation funds in retirement, the different options available to them, and how superannuation can, or should, be used throughout their retirement years.
“I find a surprising number of people who do not realise that in retirement they can take additional amounts out of their super if it suits their circumstances, or can vary their pension payouts, as long as they meet the minimum payment requirements.
“Indeed, it is easier to get money out of super in retirement than it is to get it in.
“The main consideration is that they must pay themselves at least the defined minimum pension but many also think that this is the maximum they can withdraw each year,” he said.
Mr Hutton said that many retirees also seem to look at their superannuation balance as part of their estate and hope to leave a large sum from their super to beneficiaries.
“This is simply not what superannuation is designed to do, and shows a basic misunderstanding of the purpose of superannuation.
“The government expectation has always been based on encouraging people to use super to fund their own retirement, not to create a tax-advantaged vehicle to help in estate planning.
“Superannuation is a very efficient vehicle to provide funds to live on in retirement – in line with its description as a tax-effective retirement savings vehicle,” he said.
Mr Hutton said that recent discussion about the so-called death duty lurking in superannuation is more evidence that people misunderstand the purpose of superannuation.
“The capital gains tax (CGT) obligations and tax of 16.5 percent arising when non-dependant beneficiaries receive payouts from superannuation on a member’s death have always been inherent in superannuation assets – they are not some kind of new taxes.”
Mr Hutton said that while some people will struggle to live comfortably on their superannuation savings, a number have more in their superannuation than they expect to spend, even with the most optimistic life expectancy calculations.
“Many people took advantage of the more generous contribution rules of a few years ago to build significant superannuation balances.
“This gives them options in their retirement, especially in their later years – for example withdrawing money from super to pay any bond or deposit required when they move into a retirement village or aged care home, rather than using the family home as security.
“One thing they should be careful of is using the balance in their SMSF to buy illiquid, low-yielding assets such as an investment property as this can cause problems in meeting pension payments as well as probable capital gains issue if it can’t be sold easily later,” he said.
Mr Hutton added that non-dependants benefiting from a payout from superannuation should understand that money held in superannuation has been significantly helped by attractive tax breaks throughout its existence – and the intention has never been to provide a tax-free benefit to non-dependants.
“Generally speaking, the CGT issue is unlikely to affect members of publicly-offered super funds as assets do not usually need to be sold on a member’s death to pay out beneficiaries.
“There are also techniques which allow SMSF members to minimise the likelihood of CGT liabilities, such as regularly reviewing and adjusting share portfolios held in an SMSF during the life of members.
“The risk of the exit tax can also be reduced on payouts to non-dependants on a member’s death by having arrangements in place for “deathbed withdrawals” from their super by giving someone an appropriate ‘power of attorney’ to allow them to take action,” he said.
HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and a member of the HLB Mann Judd Australasian Association.
For more information please contact:
Michael Hutton – 02 9020 4194
27 October 2011