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Withdrawal and Recontribution Strategy |
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In 2005 the ATO provided an indication that they were comfortable with the 'withdrawal and recontribution strategy'. This strategy involves at the point of retirement withdrawing as much money as you can tax free from superannuation, and then recontributing it as an 'undeducted contribution' to superannuation. This undeducted contribution then forms a tax-free part of any income stream from superannuation. Let us consider how this strategy works in practice. For our example let us use the case of a 60 year old who has decided to retire from full time employment. Let us assume that they are female and have $640,000 in superannuation assets. They have decided that they the best approach for them is to use an allocated pension to fund their retirement. At this point it is worth mentioning that there is a separate article on how allocated pensions work in the education section - if you are having trouble following the calculations in this article, it may be worth looking at that article first. First of all let us consider this person's situation without using a withdrawal and recontribution strategy. They can choose any level of income between a maximum allocated pension of $58,720 or a minimum of $33,160. Let us assume that the minimum allocated pension is chosen. The tax payable on $33,160 for the 2005/06 taxation year is $5,808 (excluding medicare). An allocated pension of $33,160 has a 15% pension rebate of $4,974 - leaving the net tax payable to be $834. This seems to be a reasonably good outcome, $33,160 of income and tax of only $834. Let us now consider the scenario if this person were to withdraw up to the maximum tax-free threshold, which is $129,751. They then recontribute this money to superannuation as a large 'undeducted contribution', which will give them a tax-free component to the resulting allocated pension. To calculate the tax-free component of the allocated pension, we need to know the life expectancy of the person in question, a 60 year old female. Looking this up on the relevant table we find her life expectancy to be 21.15 years. The tax-free component of the allocated pension in this case will be the undeducted contributions ($129,751) divided by the life expectancy (21.15 years), $6,135. Under this scenario she will still draw the same level of income, $33,160, however only $27,025 is taxable. The tax payable on this is $3,967 (2005/06). The 15% pension rebate on the $27,025 taxable income is $4,054. Therefore there is no tax payable. In this case, using the withdrawal and recontribution strategy has saved more than $800 in tax a year, or just over $15 a week. And because the tax-free component of the allocated pension remains the same every year, this saving will happen every year. In reality there is little or no cost attached to this strategy. Some funds may charge a $40-$100 fee for the initial withdrawal from superannuation. |