How to Save Thousands in Tax with a Simple Switch to Superannuation

Are you nearing retirement or already retired? If so, you need to know about a powerful strategy within superannuation that could save you thousands in tax: switching to pension mode. This article will guide you through the benefits of this switch, helping you maximise your retirement savings and unlock tax-free earnings and income.

General Advice Disclaimer

Before we dive into the details, it's important to note that this article provides general advice and does not take into account your personal circumstances, financial situation, or needs. For tailored advice, please consult with a qualified financial adviser who can deliver a personalised financial plan.

Understanding Superannuation Modes

Superannuation has two primary modes: accumulation and pension. Understanding the differences between these modes is crucial for effective retirement planning.

Accumulation Mode

In accumulation mode, you're contributing money to your superannuation fund during your working life. The goal is to accumulate wealth for retirement. However, there are tax implications to consider.

• Contributions and Growth: Contributions to your super fund grow through investments.
• Taxation on Earnings and Capital Gains: Earnings on investments are taxed at 15%, and capital gains are taxed between 10% and 15%, depending on the holding period.
• Conditions of Release: You cannot access your super until you meet certain conditions, such as reaching preservation age.

Pension Mode

Pension mode offers significant tax advantages once you transition from accumulation mode.

• Transitioning to Pension Mode: Upon meeting the conditions of release (such as reaching age 60), you can switch your super to pension mode.
• Tax-Free Earnings and Income: Investment earnings and income in pension mode are completely tax-free after the age of 60.
• Withdrawal Flexibility: You can withdraw funds as needed, with no maximum limit, though there are minimum withdrawal requirements.

Tax Savings Comparison

To illustrate the tax benefits of switching to pension mode, let's compare the tax impact in both modes using an example scenario.

Example Scenario Breakdown

Assume a 60-year-old client has $1 million in superannuation, earning 7% per annum. Here's how the tax savings play out:

Accumulation Mode Taxation: Earnings: $70,000 per year (7% of $1 million) Tax: $10,500 (15% of $70,000)

Pension Mode Taxation: Earnings: $70,000 per year Tax: $0 (0% tax rate)

By switching to pension mode, the client saves $10,500 in tax annually. This substantial saving highlights the importance of understanding and utilising pension mode.

Key Lessons and Strategies

Benefits of Account-Based Pensions

Account-based pensions provide tax-free investment earnings and income, offering financial freedom in retirement. You can withdraw funds tax-free after age 60, which is a significant advantage.

Minimum Pension Requirements

Each year, you must withdraw a minimum amount from your account-based pension. This amount increases as you age. If you don't need the funds, consider a re-contribution strategy to keep your super growing and maximise tax benefits.

Steps to Transition to Pension Mode

Eligibility and Conditions of Release

To switch to pension mode, you must meet specific conditions, such as reaching preservation age or other criteria. Once eligible, set up a pension account and manage withdrawals according to your needs.

Important Considerations

• Setting up an account-based pension before reaching age 60 can potentially have tax implications. For simplicity, it is generally easier to explore this option come age 60 to help avoid these complex taxes. We have referred to the tax treatment of account-based pensions once reaching age 60 throughout this blog for simplicity.
• Switching to pension mode before the age pension age is reached can have implications on your/or your spouses age pension.
• You must meet the eligibility criteria if you are planning to make contributions into super.

The Role of Financial Advisers

Navigating superannuation and retirement planning can be complex. Financial advisers provide invaluable guidance, especially for those seeking Shariah-compliant investment options. They ensure your retirement plan aligns with your faith and values.

Conclusion

Switching to pension mode can potentially save you thousands in tax, offering a substantial boost to your retirement savings. Remember, personalised financial advice is crucial to navigate this process effectively. Consult with a qualified financial adviser to ensure you make the most of your superannuation and retirement plan.

For personalised retirement planning advice, including strategies to maximise tax savings, contact us today. We specialise in Shariah-compliant financial planning, ensuring your retirement aligns with your faith and values.