Contributing to super can be wiser than drawing a tax-free pension

The reason a maximum contributions strategy is likely to be better is if you do start a pension, you will need to make compulsory minimum annual withdrawals of either 4 per cent (while you are under 65) and 5 per cent of your fund balance (from age 65), increasing every five or so years.

As far as converting your super balance into a pension, there are two strategies open to you.

You could start a transition to retirement pension because you are under 65 and still working. The pension payments will be tax-free, although they will not entitle your fund to tax-free investment earnings because earnings will continue to be taxed at 15 per cent, the same as super in accumulation accounts.

A pension that does entitle you to tax-free investment earnings would require a more dramatic decision on your part: retire. But that is not part of your plan.

Alternatively, you could wait until you are 65, at which time any pension you draw will be treated as if you had retired for superannuation purposes irrespective of whether you continue to work, allowing you to withdraw super as a tax-free pension or lump sums.

Colley says whether you can begin a pension can also depend on the rules of your super fund because it is a public sector fund, so it’s best to check.

One reason somebody might wish to start a pension while continuing to work and earn good money is debt, he adds. Often these are business debts, or in the current interest rate environment it may be to cover an increase in mortgage rates.

Another reason could be to make contributions to super where someone doesn’t have employer super support.

Useful calculators

Colley says he has seen pensions started so that some or all the amounts withdrawn can be recontributed as personal tax concessional contributions where they represent a greater proportion of the tax concessional limit.

This can offer a tax benefit that comes from claiming the contribution as a tax deduction against your salary income. But in your case your employer’s annual contributions given your current salary are likely to be in the region of $20,000.

As far as determining the value of any strategy you may wish to pursue, the Australian Securities and Investments Commission’s Moneysmart website has several useful super and retirement planning calculators.

Colley says Moneysmart’s super calculator is useful for anyone receiving salary and wages where their employer is contributing the standard super guarantee or greater as well as salary sacrifice and after-tax contributions.

The calculator adopts an average earnings rate of 7.5 per cent, which is a reasonable assumption. Allowances can also be made for fees.

Earnings can be adjusted because many super funds do not have earnings that are the same from year to year because of market fluctuations. Also, your income over time may fluctuate if you are promoted or do not receive expected wage rises or cease work for a period.

Your super balance will also vary with changes in your retirement age, and the calculators allow you to model this.

To be closer to the mark, you need to consider variations that may take place during your working life up to expected retirement. For this reason, says Colley, the calculators may be more useful if you reconsider your personal circumstances regularly – say every six months, for instance – to track how you expect your super balance may change in the short to medium term.