|You may get approached regularly by clients when they have reached their preservation age, on what to do with the super that they have accumulated.
Often, different clients will come to you with different financial circumstances. Some might still have a large mortgage, others might simply seek a regular income payment from their super to service their lifestyle. To help them make a more informed decision, we will explore a case study to highlight the options available and some tax implications that they should take into consideration.
Case Study John (age 60) and Jenny (age 59) are a retired married couple with $300,000 fully taxable member balances in their SMSF and a remaining mortgage on their home of $600,000.
Option 1 – Cash our super and pay down the home loan Both John and Jenny are seeking to cash out their super as a lump sum to pay off their mortgage. John’s $300,000 lump sum payment will be tax free as he’s over 60 years of age. While Jenny will have to pay tax on the $75,000, as the low-rate cap amount for the 2021-2022 financial year is $225,000. This option will completely deplete the couple’s super. However, they may have the option to access the Aged Pension.
Option 2 – Commence account-based pensions Being on an account-based pension means both John and Jenny can cash out their entire super balance, as there isn’t a maximum withdrawal limit, however they will need to pay themselves a minimum pension annually. John’s pension payment will be tax-free as he over 60 and Jenny will have to pay tax at her marginal tax rate, less a 15% tax offset on her pension payment. If both pay a high portion of super out as pension (i.e., all in the same year), Jenny will be likely to pay more tax compared to taking her super out as lump sum and at the same time, it will be less likely that they will be eligible for the Aged Pension that year. Thus, paying themselves a small minimum pension gradually over the years means they will have to service their debt longer.
Option 3 – A mix of both options John can cash out all his super as a lump sum payment, Jenny pays a lump sum of $225,000 and commences account-based pension on the remaining $75,000.
Taking this option allows the couple to pay off most of the mortgage. Both John and Jenny won’t be paying tax on their lump sum payments. And at the same time, they’re more likely to qualify for the Aged Pension in comparison to taking option 2.
Both couples will still have the option to top up their super by making both concessional and non-concessional contribution, subject to contribution cap rules, until they reach the age of 67 where they’re required to meet the work test to make contributions.
This article provides a general overview of the possible options for your clients. To further discuss what is the best option for each individual clients, please feel free to contact us.
by Alex Polorotoff
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