This article addresses several personal finance questions, offering expert advice on age pension qualification strategies, superannuation, and the taxation of compensation payments for Self-Managed Superannuation Funds (SMSFs), and the efficacy of salary sacrificing for individuals with moderate incomes.
Age Pension and Superannuation Strategies
A couple, aged 67 (working full-time) and 56 (working part-time), with $1.2 million in mortgage-free superannuation, debated adjusting assets to qualify for a part age pension. The expert's view generally discourages 'financial gymnastics' to gain minor pension benefits, especially if it involves reducing superannuation.
An opportunity exists due to the 11-year age gap: superannuation in the 56-year-old spouse's name would not count towards the age pension assets test for the 67-year-old's application until the younger spouse reaches pension age. This could temporarily improve means testing for the age pension.
However, a significant transfer of superannuation to the younger spouse for pension maximization reasons could lead to the transferred portion remaining subject to 15 percent earnings tax, as it would not be converted to a tax-free pension upon retirement for the older spouse. The potential pension gain might be offset by increased tax payable. Equalizing superannuation balances between partners is generally recommended for equity and transfer balance cap considerations, rather than solely for age pension benefits.
SMSF Compensation Taxation
An SMSF receiving over $80,000 in compensation from the Compensation Scheme of Last Resort (CSLR) for past poor advice will have this payment taxed as income when received by the fund, incurring a 15 percent tax rate. It is advised to confirm this with the SMSF's accountant, especially when winding up the fund.
Salary Sacrificing for Retirement
For an individual earning $43,000 per year and approximately 10 years from retirement, salary sacrificing to superannuation offers minimal tax savings. Income between $18,201 and $45,000 is taxed at 16 percent, while superannuation contributions are taxed at 15 percent, resulting in only a 1 percent tax saving. This saving comes at the cost of losing access to the money until at least age 60. A potentially better strategy is to make an after-tax contribution to super to qualify for the government's co-contribution payment, which can be up to $500.