The accepted wisdom is that as soon as you retire in Australia and are over 60 years old, or as soon as you hit 65 years old even if you are still working you should shift your superannuation from accumulation to pension mode. You can transfer up to $1.9 million per fund member into pension mode currently. Investments in pension mode have zero tax. This is in comparison to 15% tax in accumulation mode with a 1/3 reduction for long-term capital gains.
But what if you have a lot of investments outside of superannuation? These are highly taxed and so doesn't it make sense to run these investments down first to reduce your overall tax? In pension mode there are required minimum withdrawals each year. If you don't spend that money it is simply added to your highly taxed non-super investments. So, despite not having to pay tax on your money in super, you are transferring more and more money out of super into your taxable accounts. Does it make sense to wait till you have spent your non-super investments?
I ran a simulation in my long-term projection spreadsheet. This isn't a Monte Carlo simulation. I just assume my historical average rate of return over the last 20 years applies into the future. I assume that I retire at age 65 and convert my super to a pension and Moominmama converts her super to a pension at age 60. She stops working when I do. I also assume that the tax rate on investments outside super is 20% of returns (without any attempt to define realised and unrealised gains) and in super in accumulation mode is 12.5%. Both are probably at the high end of what might actually happen. But the contrast with zero tax in pension mode, makes pension mode more attractive relative to accumulation mode. The simulation runs to 2050.
I also run a simulation where all our super stays in accumulation mode. This no pension scenario has 8% more assets in 2050 than the pension scenario.
This modelling is still not that realistic. I assume that all our superannuation can be moved to pension mode, even if we exceed the $1.9 million threshold. Also, we are likely to make more non-concessional contributions to Moominmama's account before 2029 and I assume we don't. I'm think that these tweaks won't change the fundamental result. We would have to have a lot less non-super investments to change the conclusions.
5 comments:
I had played around with trying to work out the answer to this same question and gave up, as you have to make too many assumptions and simplifications to make the modelling not become too complex. eg. What if the $1.9M left in accumulation mode grows to hit the $3M cap when the extra 15% tax (on 'growth' of balance ie. including unrealised CG, kicks in?). What if you invest the compulsory pension payouts as contributions into spouse accumulation account? or add to an investment mortgage offset account, or use to fund negatively geared share or property investment. Or invest in a 'tax effective' option within an Investment bond (so about 20%-30% internal tax rate on income, and 0% CGT on any CG due to unit price growth if cash out some IB after 10+ yrs?). The whole modelling exercise ended up in the 'too hard' basket.
I'm basically just going to roll the TBC into pension phase once I hit 65yo, and then the min pension wdls will go into either my regular IB contributions (the cap grows 125% each year from prev yr contributions without resetting the 10-yr CGT free trigger) or add to the money in my investment property mortgage offset account.
The other thing to try and consider in any modelling is that you can also move pension phase super back into accumulation phase -- so as the min required withdrawal rate increases with age (eg. 5% 65-74, 6% 75-79. 7% 80-84, then start jumping rapidly: 9% 85-89, 11% 90-94, then 14%) you might want to shift the max $1.9M into pension phase at age 65 to get the 0% tax rate, and then rollover some pension phase back into accumulation phase if it provide more than required retirement income stream when the required withdrawal rate ticks up (esp. when min wdl rate is higher than expected ROI rate), and then possible move more back into pension phase once your TSB hits the $3M threshold where the extra 15% tax rate (30% total) will apply to 'increase in value' ie. also some unrealised long term capital gains within super, which makes it worse than even CGT for long terms capital gains in personal name at the highest marginal tax rate (due to the 50% CGT discount). It is all quite complex and hard to accurately model
Yes, it seems pretty sensitive to assumptions. Since I wrote that post I changed some assumptions and now starting a pension as soon as possible is best but only by a small margin like 3%.
I didn't know you could switch back again! Anyway, I totally ignored the $3 million limit in all this as I am assuming it won't happen. I have improved my retirement modelling a lot as a result of this exercise though.
Apparently you can, but of course the SMSF admin might be a roadblock, as they have to send the ATO another TBAR notification to get the transfer balance account correctly adjusted, and amend the accounting records etc. I couldn't find anything on eSuperfund FAQs about moving part of SABP account back into your "Accumulation account" so I will probably have to ask about that if and when the time comes. Similar to when I wanted to start a TRIS -- the default was to move the entire balance in TRIS, but it turned out it was possible to move a specific (partial) amount instead when I enquired.
https://www.afr.com/wealth/personal-finance/can-i-move-money-in-my-pension-back-to-accumulation-phase-at-75-20210622-p5837l
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