Retirement Planning Opportunities - Changes to Superannuation

• November 2005

When planning the transition to retirement, workers now have another strategy for consideration.

As of the 1st July 2005 managed superannuation funds can offer non-commutable income streams. The purpose behind this is to allow a person below the age of 65 to access superannuation without having to retire.

Non-commutable income stream

A ‘non-commutable income stream’ refers to your retirement income (via pensions or annuities) from a superannuation fund that prevents you from withdrawing money in a lump sum.

The introduction of the Federal Government’s new rule enables a person of ‘preservation age’ (now around 55 years) to place either all or part of their salary into superannuation. In order to supplement or replace their income they could then commence a non-commutable income stream.

This new condition does not have any prescribed work test, so a person can continue working in any capacity (full time/part-time/casual) and still be able to a draw a non-commutable income stream. By introducing this option older workers can now supplement their income with their accrued superannuation savings irrespective of their employment status.

Benefits

Under the new rule there is the potential for substantial tax savings. The amount of your salary you decide to sacrifice will be taxed at 15 per cent rather than your marginal tax rate. This will be particularly beneficial to high-income earners.

In addition to this you have the option to transform your income from non-rebateable to rebateable. By commencing a non-commutable income stream and changing to rebateable you could receive up to a 15 per cent rebate on the pension income.

Lastly, the superannuation benefits, which are used to fund the NCIS, will not attract any tax on related investment earnings. IF the benefits remained in the accumulation phase of the superannuation, then a 15 per cent tax on investment earnings would apply.

Future Developments – Splitting Super

Further tax benefits could be on the way if the Government approves a draft to split superannuation with your spouse.

The proposed superannuation legislation views couples as a unit whilst under current legislation spouses have to fund their own retirement in isolation from their partner.

This will particularly benefit low income or non-working spouses by allowing them to have access to their partners super and fund their own retirement.

By splitting the superannuation, a couple will effectively be able to benefit from having two tax free thresholds, and therefore pay less tax.

If passed the new legislation will take effect from 1st January 2006.

Should you require any further information or legal support in understanding the effect of the new legislation please do not hesitate to contact our office.

This publication contains general information only. It is not provided as legal advice. Professional advice should be taken before any course of action is pursued, or any information herein relied upon.