Tax rules keep people in jobs

Far from being a tax dodge, the ability to start a superannuation pension while still working encourages people to stay in the workforce for some time. With our ageing population and the higher age pension eligibility age of 67, such assistance to help people to work longer offers a major benefit to the economy.

Critics of the current arrangements focus on the fact that receiving a tax-free funded superannuation pension after age 60 as well as an ongoing wage income reduces tax collections. This assumes people would continue to work and earn the taxable income if they weren't able to commence a transition to retirement pension.

This is a questionable assumption because the rules only allow transition to retirement pensions after taxpayers reach their compulsory preservation age, now age 60 for most taxpayers. After reaching this age, everyone has total access to superannuation tax-free, either as a pension or lump sum in one of two ways.

The first is by retiring from the workforce, defined as working on average for less than 10 hours a week. The second is to change jobs after the age of 60, in which case their current super becomes unrestricted and unpreserved, and can be withdrawn as a lump sum or tax-free superannuation pension.

Starting a new job requires only that new super contributions have to be preserved until retirement or reaching age 65, whichever is the earlier. All past super is accessible as either a tax-free pension or lump sum while still working.

Clearly the transition to retirement pension option aims to reduce the temptation to leave the workforce even temporarily in order to gain access to super.

The transition to retirement rules limit the annual pension to 10 per cent of the starting account balance and do not allow access to lump sum withdrawals. These are much stricter requirements than those applying to normal superannuation pensions, where there are no limits on withdrawal.

For personal planning purposes, given the speculation about possible changes to the transition to retirement provisions, there's an incentive, if eligible, to commence a pension immediately, even before the age of 60.

Only people born before July 1, 1965, whose compulsory preservation ages range between 55 and 59 are eligible to start a pension before age 60. The drawback is that until age 60 part of their pension will be taxable, but this liability can be reduced by drawing only the minimum required pension of 4 per cent of salary.

The advantage of starting a pension now is that for administrative reasons, the government would find it difficult, as well as unpopular, to force people to commute an existing pension back to a lump sum superannuation account.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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