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Make sure you avoid the pitfalls of superannuation and retirement

Do some serious planning before you retire.

Do some serious planning before you retire. Photo: TND

Australians are retiring in record numbers, with six million people  drawing down on their superannuation savings and a further three million expected to join them in the next decade.

That’s creating some problems for super funds in dealing with the flood, ASIC commissioner Simone Constant said.

“We need super fund trustees to step up right now and step in to make sure they put good outcomes for members at the heart of everything they do,” Constant told a recent conference.

“Members need confidence in efficient and fair service delivery to support them participating in a full and confident retirement.”

That is a veiled criticism implying that some funds are better at taking money while members work than delivering them the services they need in retirement.

A common complaint is that switching into retirement mode and drawing on a pension can take more time than you planned.

This is particularly the case when retirees plan to draw on the age pension and super, according to Ash Fowler, policy manager with the Combined Pensioners and Superannuants Association.

“New applications for the age pension are very slow, with people waiting up to five months to receive pension payments. There are now 50,000 Australians waiting for their first pension payments,” Fowler said.

So the important thing to do before retirement is to get onto your super fund so you can get quick access to a super pension to tide you over till the age pension arrives.

“Plan for it early,” Paramount Financial Solutions principal Wayne Leggett said.

“Think about how much you will need in retirement, look at how much the ATO demands you take out of your super and what you will need to have the retirement you want.”

If you are under 65 the minimum drawdown annually is four per cent of the fund. If you hit 95, it’s 14 per cent.

A big no-no is taking all your money out of super and putting it in the bank, which is a temptation for some people.

“That takes it away from the tax-free super environment and will cost you in the long term,” Leggett said.

Simply move your account from accumulation to an account-based pension which your fund or adviser can help you with.

Work out what you need.

If that includes a lump sum to pay down debt or buy a retirement asset, treat it as a withdrawal from your pension.

Superannuation is not forever

Don’t be afraid to spend up more of your super while you can enjoy it.

“There’s not much point in holding onto your super till you hit your 90s and have to withdraw 14 per cent every year, which you probably can’t spend,” said Thabojan Rasiah, principal of Rasiah Private.

So look at spending in your 60s and 70s on things you plan to enjoy. As an old neighbour of mine used to say “I don’t want to be the richest man in the cemetery”.

Also plan for what happens to your super when you die.

If a couple both have super and have made a reversionary pension declaration through their fund and one dies, then the deceased pension simply flows to the surviving partner.

That pension can also flow to a child under 19, a dependent child under 25, or a child or other who is dependent on the deceased through disability.

It is a good idea to make a binding death nomination through your super fund that directs your fund trustees to pay your super to the heirs you select.

If you don’t your super will be paid into your estate and dealt with under your will, which will be slower that using a death nomination.

Super and estate planning

Super balances are broken down into two categories by the ATO: concessionally taxed and after-tax payments.

The contributions you get through the super guarantee, salary sacrifice or concessional contributions – all have been taxed at a low rate of 15 per cent.

The ATO considers those only for the benefit of the fund member or dependent and if they are paid out after death to a non-dependent, a catch-up tax will apply.

In the hands of, say, an adult child, the ATO will apply a tax of between 17 and 22 per cent.

To get around that, some people use what are known as recontribution strategies.

That means once you retire you take out concessional contributions then recontribute them to your fund as non-concessional contributions, which are not taxed in the hands of non-dependent heirs.

If you plan to do this, get good advice to determine the classifications of different parts of your super balance and how much you are actually allowed to recontribute.

This is complex but from July 1 non-concessional contributions will be able to be grossed up for three years and a maximum of $360,000 paid in one hit.

There are strict limits on non-concessional contributions and those with more than $1.9 million in super can’t use them.

The strategy can be useful for far smaller amounts than talked of here. Again, make sure you have good advice before trying this.

The New Daily is owned by Industry Super Holdings

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