Reader’s question: I am 72 and retired and have an annual government defined benefit pension of $41,500. In addition I have $420,000 in an industry balanced super fund.
I am very unhappy with the returns on the latter and would like to withdraw the money entirely and put it into term deposits or online savings accounts.
If I do this, am I still eligible for annual tax-free income of up to $18,200 or will the defined benefit pension income prevent me from doing this?
It depends on which government you are talking about, responds pensions expert Peter Crump of ipac South Australia. The Commonwealth and some states have their superannuation arrangements maintained on an “unfunded” basis. This means the government covers pension payments on an ongoing basis from consolidated revenue.
Some states, Queensland being one example, moved to a “funded” arrangement, which is what private sector employees have.
If you’re currently paying some tax or receive a pay-as-you-go statement from the pension, it means your pension is paid from an unfunded scheme.
The tax that is payable is based on your normal marginal rates, with a 10 per cent “offset” of the taxable amount. This means you might pay little or no tax on the pension currently.
With regard to your inquiry about the $18,200 tax-free threshold, you will certainly be eligible for this and perhaps even more under the higher seniors and pensioners tax offset.
This is, however, likely to be adversely influenced by the strategy you are contemplating of withdrawing the $420,000 from super and investing this in cash or term deposits.
This will generate taxable income that will be added to your government pension income. While it is likely you are paying little or no tax on your current pension, given the tax offset, how much income you earn outside super could be taxed at a marginal rate of 32.5 per cent.
An alternative strategy you might consider is investing your industry fund money in a cash or term deposit investment option and then starting a super pension from this where there will be no tax on investment earnings or the pension.
It will cost you fees to maintain the pension account which you will need to investigate but you could find yourself better off compared with investing outside super and paying tax on the income.
You can research this yourself or seek some financial advice.