Super in an older age
Written by Graeme Colley, Executive Manager, SMSF Technical and Private Wealth – SuperConcepts
Some people think that once retirement has arrived there’s little more to do when it comes to their super. But don’t forget, anyone retiring at 65 years of age may have a life expectancy of around 20 years*, so there’s still many things to consider as superannuation needs to last for the retiree’s foreseeable future. Contributions can still be made to super if members qualify, fund investments must be made, and benefits paid to members as lump sums or pensions.
When considering super contributions, there is a general cut-off age of 75 years old for personal contributions. Actually, to be precise the cut-off age is 28 days after the month in which a person reaches 75 years of age. There is a work test that applies after reaching the age of 67 for anyone wishing to make any personal super contributions. A person needs to work at least 40 hours in 30 consecutive days in a financial year prior to making the contributions. However, for anyone at least 65 years old and qualifies, it is still possible to make downsizer contributions of up to $300,000 within 90 days of selling their main residence as long as it has been owned for at least 10 years.
In this year’s Federal Budget, the government has proposed to abolish the work test for non-deductible personal contributions from 1 July 2022. If this proposal makes it into law, for those aged between 67 and 75 years old, there will be no requirement to meet the work test when making non-deductible personal contributions to super.
Superannuation contributions can be made by an employer for anyone working beyond 75 years old. However, the contributions are limited for purposes of the superannuation guarantee and those made under an industrial award.
Investing and investments
There may be contribution limits on anyone who is at least 67 years old, but the fund’s investment decisions will still need to be made by the trustees no matter how old they are. After all, the trustees are responsible to act in the member’s best interests by investing appropriately and ensuring benefits are paid when they are due.
The investment decisions need to be in line with the fund’s investment strategy which must be reviewed annually and consider the investment risks, diversification, cash flows and insurance. The trustees are required to ensure investments comply with the superannuation legislation concerning lending, borrowing and investing with related parties.
The core purpose of superannuation is to ensure the amount accumulated will be used to partially or fully support a person’s needs in retirement, and to reduce the need to rely on the age pension. However, there is no mandatory requirement for withdrawals to be made in a pre-determined pattern. However, the income earned by the fund on investments that support a member’s accumulation account are taxed at 15% less any franking credits.
If a member is receiving a pension from the fund, a minimum annual amount is required to be paid, which is dependent on the balance in the pension account and the person’s age. For anyone who is 75 years old, the standard minimum is equal to 6% of the pension account balance on 1 July of the financial year. However, if the pension commenced or ceased during the year, a pro-rata pension amount is required to be paid. For the 2020/21 and 2021/22 financial years, there is a 50% reduction in the standard rate of pension so that anyone 75 years old is required to receive a minimum pension equal to 3% of their account balance.
The main benefit of commencing a pension is that income earned on investments supporting the pension is tax exempt in the fund. Also, anyone older than age 60 in receipt of an account-based pension will receive the amount tax free. The downside for some is that they may have sufficient private resources to provide their desired lifestyle, and any pension may be more than the amount required to meet their daily living expenses.
There are no hard and fast rules about drawing amounts from super with the exception that on your death it is compulsory for your dependents on your death to become entitled to lump sums, pensions, or a combination. So, an individual can leave the amount that has been accumulated in super for as long as they like, and it can continue to accumulate at tax concessional rates.
Leaving retirement savings in super for as long as possible may work up to a point. However, it may be worthwhile for a person, or a couple, to consider having some private investments held in their name as the earnings may be tax free depending on the available tax rates applying to the individuals. So, a combination of superannuation and personal investments may turn out to provide a worthwhile tax outcome in combination rather than having all their eggs in one superannuation basket.
Proposals from the May 2021 budget
The Federal Budget had some good news for many but one of the key announcements for persons aged between 67 and 75 years was the proposal to abolish the work test for personal non-concessional; and employer salary sacrifice contributions up until the age of 75. The work test will still be in place for anyone wishing to claim personal deductible concessional contributions.
The main points for super in older age:
– Making super contributions after the age of 75 may be severely limited.
– Downsizer contributions after the age of 65 apply for those who qualify without the need to meet a work test and there is no upper age limit.
– The advantages of the tax benefits gained from the investments held in super.
– A combination of super and investments held personally or in combination with a person’s spouse may provide a better tax outcome if that’s important.
– There is no compulsion to withdraw amounts from super, but it is compulsory to have benefits withdrawn as lump sums or pensions on a member’s death. So, it is possible to leave super alone unless it is required for health care or aged care expenses.
– The Federal Government’s proposals to abolish the work test from 1 July 2022 will make it easier for personal non-concessional contributions to be made to super.
* Life expectancy at age 65 – Males 19.86 years, Females 22.47 years: Australian Government Actuary, Australian Life Tables 2015-17
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This document contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. The examples used are illustrative only and are not an estimate of the investment returns you will receive or fees and costs you will incur.