Thinking about starting your pension soon? Why you might want to wait until July!
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Members of the SDC who are about to retire and draw a pension from their self-managed super funds (SMSFs) might want to think about waiting until after July 1st.
Why is that? Well, from 1 July the transfer balance cap (TBC) will increase from the current $1.7 million to a much higher limit of $1.9 million. This means that retirees who wait until this new date will be able to transfer additional funds into their pension and if you start a pension before July 1, you won’t benefit from the full increase.
But, is it really worth waiting until the 1st? The answer is that it depends. One of the great benefits of starting your pension as soon as possible is that your self-managed super fund (SMSF) won’t have to pay income tax on some or all of its investment earnings (such as dividends, rent, interest, and capital gains).
This might seem a little hard to visualise, but let’s take a look at a hypothetical example.
Let's say a single SMSF member with $2 million in super started their pension on February 1st 2023. The actuary for the SMSF estimates that they’re exempt from paying tax on 35 per cent of the fund's income for the financial year (rent, dividends, interest, capital gains and so on) since the pension commenced mid-way through the year.
If the pension had been delayed until July 1, the SMSF (and thus the member) would have been able to claim an extra $200,000 in their pension starting balance. This, in turn, would increase the fund's tax break on future years' income as a higher percentage of the fund's income should qualify for an exemption.
For example, if the fund earned $100,000 in taxable income in 2023-24, the tax break of starting the pension on July 1st, instead of February 1st would amount to $1500.
To illustrate this, 85 per cent of $100,000 ($85,000) would be exempt from taxes under the February 1st scenario, whereas 95 per cent ($95,000) would be exempt under the July 1st scenario. Knowing this, the savings can be calculated as $10,000 x 15 per cent = $1500. This equates to a saving of $1500, which is calculated as 15 per cent of the $10,000 difference between the two scenarios).
On the other hand, if the pension was delayed until July 1, the SMSF (and therefore the member) would miss out on this tax break, but they would be able to put an extra $200,000 into their pension – it would start at $1.9 million instead of $1.7 million.
However, waiting until July 1st could cost the retiree $5250 in the first year due to the fact that some of the fund's income for 2022-23 wouldn't be exempt from taxes in their full amount. In such cases, $35,000 of the $100,000 earnings would be subject to taxes (35 per cent x $100,000) and the total savings would amount to 15 per cent x $35,000, or $5250.
So, is it worth delaying the pension until after July? Well, that really depends on the amount of income the SMSF earns in the 2022-23 financial year.
If the fund's income remains the same as the hypothetical $100,000 figure, it will take at least three to four years for the numerous small savings provided by the increased transfer balance cap to surpass the initial cost of waiting for it. Therefore, the decision is not a straightforward one.
What's more, sometimes waiting will not be the best option. For instance, if the SMSF has just sold a high-value asset and registered a capital gain in the 2022-23 financial year, it’s more profitable to start the pension as soon as possible so that more of the fund's income will be exempt from taxes.
It’s also important to remember that, as per the ATO website, ‘No single TBC will apply to all individuals. Individuals will have a personal TBC between $1.6 and $1.9 million.’
Australian Financial Review Contributor Meg Heffron suggests that waiting until July is probably better in the long term, but not by as much as it might seem.
On the flip side, the benefit of starting a super pension as soon as possible is the tax-free pension earnings and withdrawals. Once you start your pension, it is also very difficult to make additional contributions.
At the end of the day, it is best for you to calculate your particular figures in order to make up your mind. Please also note that, while we do our best, we’re not financial experts and nothing in this article should be construed as financial advice.
You can see your personal transfer balance cap, available cap space, and transfer balance account transactions online through the ATO link in myGov.
It might also be helpful to seek advice from a financial adviser who can go through the details and help you make a sound decision.
Looking for a financial adviser? Here are six expert tips to find the best one for you.
Do you have any tips for staying on top of updates or getting the most out of your pension? Share your thoughts or experiences with us in the comments section below!
Why is that? Well, from 1 July the transfer balance cap (TBC) will increase from the current $1.7 million to a much higher limit of $1.9 million. This means that retirees who wait until this new date will be able to transfer additional funds into their pension and if you start a pension before July 1, you won’t benefit from the full increase.
Should you wait until July 1? Credit: Shutterstock
But, is it really worth waiting until the 1st? The answer is that it depends. One of the great benefits of starting your pension as soon as possible is that your self-managed super fund (SMSF) won’t have to pay income tax on some or all of its investment earnings (such as dividends, rent, interest, and capital gains).
This might seem a little hard to visualise, but let’s take a look at a hypothetical example.
Let's say a single SMSF member with $2 million in super started their pension on February 1st 2023. The actuary for the SMSF estimates that they’re exempt from paying tax on 35 per cent of the fund's income for the financial year (rent, dividends, interest, capital gains and so on) since the pension commenced mid-way through the year.
If the pension had been delayed until July 1, the SMSF (and thus the member) would have been able to claim an extra $200,000 in their pension starting balance. This, in turn, would increase the fund's tax break on future years' income as a higher percentage of the fund's income should qualify for an exemption.
For example, if the fund earned $100,000 in taxable income in 2023-24, the tax break of starting the pension on July 1st, instead of February 1st would amount to $1500.
To illustrate this, 85 per cent of $100,000 ($85,000) would be exempt from taxes under the February 1st scenario, whereas 95 per cent ($95,000) would be exempt under the July 1st scenario. Knowing this, the savings can be calculated as $10,000 x 15 per cent = $1500. This equates to a saving of $1500, which is calculated as 15 per cent of the $10,000 difference between the two scenarios).
On the other hand, if the pension was delayed until July 1, the SMSF (and therefore the member) would miss out on this tax break, but they would be able to put an extra $200,000 into their pension – it would start at $1.9 million instead of $1.7 million.
However, waiting until July 1st could cost the retiree $5250 in the first year due to the fact that some of the fund's income for 2022-23 wouldn't be exempt from taxes in their full amount. In such cases, $35,000 of the $100,000 earnings would be subject to taxes (35 per cent x $100,000) and the total savings would amount to 15 per cent x $35,000, or $5250.
So, is it worth delaying the pension until after July? Well, that really depends on the amount of income the SMSF earns in the 2022-23 financial year.
If the fund's income remains the same as the hypothetical $100,000 figure, it will take at least three to four years for the numerous small savings provided by the increased transfer balance cap to surpass the initial cost of waiting for it. Therefore, the decision is not a straightforward one.
What's more, sometimes waiting will not be the best option. For instance, if the SMSF has just sold a high-value asset and registered a capital gain in the 2022-23 financial year, it’s more profitable to start the pension as soon as possible so that more of the fund's income will be exempt from taxes.
It’s best to seek qualified financial advice before making any decisions. Credit: Shutterstock
It’s also important to remember that, as per the ATO website, ‘No single TBC will apply to all individuals. Individuals will have a personal TBC between $1.6 and $1.9 million.’
Australian Financial Review Contributor Meg Heffron suggests that waiting until July is probably better in the long term, but not by as much as it might seem.
On the flip side, the benefit of starting a super pension as soon as possible is the tax-free pension earnings and withdrawals. Once you start your pension, it is also very difficult to make additional contributions.
At the end of the day, it is best for you to calculate your particular figures in order to make up your mind. Please also note that, while we do our best, we’re not financial experts and nothing in this article should be construed as financial advice.
You can see your personal transfer balance cap, available cap space, and transfer balance account transactions online through the ATO link in myGov.
It might also be helpful to seek advice from a financial adviser who can go through the details and help you make a sound decision.
Looking for a financial adviser? Here are six expert tips to find the best one for you.
Do you have any tips for staying on top of updates or getting the most out of your pension? Share your thoughts or experiences with us in the comments section below!
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