Question 1

Thanks for your ongoing advice, Craig. You have probably answered this before but I missed it. My wife and I each have small ($60,000 and $90,000) in super pension accounts. We also have $500,000 in separate accumulation accounts, thanks to downsizing contributions. Should we transfer some or all to our pension accounts?

Yes, its normally a good idea to transfer your super into a pension as all earnings within a pension are tax-free whereas earnings inside super are taxed at 15 per cent (less any offsets). Therefore, for the same investments, your pension fund will achieve a higher net (after tax) return.

The Super Members Council recently released some research on this topic. It found that about 700,000 Australians aged over 65 and not working full time have an accumulation (savings-phase) account. As a result, they may be paying additional and unnecessary tax.

To quote from the report: “If someone keeps $100,000 in an accumulation account instead of moving it to a pension account, they could pay an up to extra $4500 in super taxes over their retirement. For $200,000 balances, the extra tax could be $9000”.

However, you also have to take into account that when funds are in super, they can just sit there. In pension phase, you need to draw down a minimum amount each year.

The minimum is based on your age and account balance, as shown in the below table.

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Question 2

What is a wrap-style super fund? What advantages or disadvantages do they have compared to a standard industry super fund?

A wrap-style super fund gives you, or your financial adviser, access to a wide range of investments that otherwise would not be accessible.

This could be managed funds, shares, including international shares and investments that are unlisted on the share market. They also offer consolidated and sophisticated reporting and transaction capabilities.

Another potential advantage is how they deal with tax.

Generally, tax is calculated at your individual level, so it’s very transparent and fair. However, this is an advantage only if you do consider the tax consequences of any trades, switches or redemptions. I have seen a few people be caught out when they exit these funds not realising, they have to pay outstanding tax liabilities first.

With an industry super fund, tax is calculated at a whole of fund level, not an individual one. Any tax is already incorporated into unit prices, so your balance should be net of any tax liabilities. However, you have no control of the tax yourself.

Whilst wraps offer more investment choice and greater tax transparency, that does come at an extra cost.

You need to work out if you need all those additional investment options.

If you are comfortable outsourcing the investment decision to your super fund, then there are plenty of high-performing and relatively cheap industry funds to choose from.

Question 3

At 66 and still working (self employed), all super contributions have to go into my smaller accumulation account; not into my account-based pension. Can l keep creating smaller pension accounts from my accumulation account over the coming years if l keep working? To save on the tax on earnings.

Yes, although it’s worth pointing out that when you start a pension with your super, you can’t add to it. However, you can start a new super accumulation account for any new contributions, which you have done.

You can start as many pensions as you like as long as you stay under the transfer balance cap and meet the minimum starting balance imposed by your super fund (typically anywhere between $10,000 to $50,000). Alternatively, you can roll back your existing pension into your super accumulation to combine the funds, then start a new pension. This may be easier to manage in the long run.

Not being able to directly add to a pension account is something that many industry participants and super funds are lobbying to change. Currently, it is a bit of an admin hassle for people to have separate (multiple) pension and accumulation accounts. We will wait and see if they are successful in having the rules changed.

Craig Sankey is a licensed financial adviser and head of Technical Services and Advice Enablement at Industry Fund Services.

Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.

Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.