It is now over six months since the government introduced its new 15 per cent tax on the income in pre-retirement pension accounts. This has made them much less attractive for some people but they still offer valuable benefits for others.
Previously such pension accounts paid no tax on their income giving them an advantage over super accumulation accounts which pay 15 per cent tax. This meant most people who had reached their preservation age would benefit from a pre-retirement pension.
Many people use the extra income that pre-retirement pensions provide to help meet living costs, which enables them to sacrifice more of their salaries into superannuation. This is known as a transition-to-retirement strategy.
Previously this eliminated the tax on the earnings in people’s super accounts and the salary they sacrificed into super was taxed at only 15 per cent instead of their marginal rate. Even if they were under age 60 and had to pay a small amount of tax on the pensions received they were still ahead.
The new tax has changed the picture. Also the amount people can contribute to super has been reduced and fewer people can now start pre-retirement pensions as the preservation age has risen from 55 previously to 56 now and 57 from July this year.
Pre-retirement pension accounts are now taxed the same as super accumulation accounts for those under 65. As well as the new tax on earnings in their fund workers under sixty must also pay a small amount of tax on pre-retirement pension income they receive.
Salary sacrificing up to the $25,000 contribution limit (including employer payments) still makes a great deal of sense for all but low income earners. If workers under age 60 need extra income to be able to afford the maximum contributions a pre-retirement pension is still a good move.
However if they can afford maximum salary sacrifice contributions without needing pension fund income they are likely to be better off not starting a pre-retirement pension.
Workers over 60 have the advantage that income payments they receive from pension accounts are tax free. So they are unlikely to be worse off by starting a pre-retirement pension. They will be better off if it helps them salary sacrifice up to the maximum.
People over 65 who are still working are not affected by the new tax so starting a pension before retirement is still usually smart for them.
Superannuation still offers major advantages for most older workers but the rules are very complex. Professional advice can help ensure the right decisions are made.