A pension refresh strategy involves commuting an existing pension and commencing a new pension to include contributions accumulated since the original pension was initially established.
Starting a superannuation pension does not prohibit a person from continuing to make or receive contributions to super.
However, contributions are unable to be made to a pension account.
Contributions must be made to an accumulation account.
Therefore a person who continues to make contributions after starting a pension will have an accumulation account and a pension account.
There are a number of reasons why people undertake a pension refresh strategy.
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Another term used for a pension refresh strategy is a pension recast strategy.
The Transfer Balance Cap needs to be taken into account when considering the option of a pension refresh strategy.
Pension Refresh Strategy Process
A pension refresh strategy can be done at any stage throughout a financial year.
The process involves commuting a pension back to accumulation phase and then commencing a new pension.
The reasons why a pension refresh strategy may be beneficial is for one or more of the reasons below.
| Reason | Details |
|---|---|
| Tax | Tax on earnings in accumulation phase is 15% compared to 0% in account based pension phase |
| Tax | Could be part of a recontribution strategy to improve tax-free proportion |
| Simplify | Allows for consolidation of retirement savings into one account |
| Fully Retired | No further contributions expected and therefore better to have all in pension phase |
| Investment Strategy | Having all retirement savings in one account can allow for a more focused investment strategy |
| Fees | Having all super in one account can reduce fees |
| Centrelink | Might want pension to be assessed under deeming rather than deductible amount |
Each of the items in the table above are elaborated on below to further explain the potential benefits of a pension refresh strategy.
Keep in mind, if you are refreshing a pension part way through a financial year, you need to ensure minimum pension payment requirements have been met.
Pension Refresh Strategy Tax
Earnings derived from investments (including capital gains) within a superannuation accumulation account are taxed at up to 15%.
Earnings from investments supporting an account based pension are received tax free.
Implementing a pension refresh strategy can ensure all retirement savings are in tax free pension phase, eliminating all earnings tax.
It should be noted that earnings within a transition to retirement pension are taxed in the same way as savings in an accumulation account.
Therefore, a transition to retirement pension refresh strategy does not reduce tax on earnings.
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Recontribution Strategy Pension Refresh
One way to implement a recontribution strategy is to withdraw income received from a pension account and recontribute it to super as a non-concessional contribution.
A recontribution strategy is generally only beneficial for individuals over age 60 with a relatively high taxable component in their pension account.
Essentially, the pension income, which includes taxable components, is withdrawn and then recontributed as a non-concessional contribution into an accumulation account.
The non-concessional contributions form part of the tax-free component in super.
The pension is then refreshed to pick up the contributions made into the accumulation balance, effectively increasing the tax-free proportion of the pension.
Increasing the tax-free component of a pension by converting taxable components to tax-free has two benefits.
Firstly, it can reduce potential death benefits tax.
This is because the tax-free component is received tax free and the taxable component is taxed at 15% if paid to a non-tax dependant upon death of the superannuation member.
Secondly, it can protect against changes in legislation.
Previously, the taxable (taxed) component of pension income and lump sum withdrawals was assessed for tax for people over age 60, just as it is now for people under age 60.
Despite the taxable component now received tax free when withdrawn from super over age 60, it is always possible that super rules could revert back.
Therefore a recontribution strategy and pension refresh strategy can protect against such potential changes in legislation.
A recontribution strategy calculator has been included below to help determine the benefits of a recontribution strategy.
It is always best to receive personal professional advice prior to performing a recontribution strategy or pension refresh.
Pension Refresh Strategy Consolidation
Having a superannuation accumulation and pension account can increase time taken to administer your retirement savings.
Also, depending on where your super is held, having two accounts may increase costs.
The increase in costs may be administration costs, member fees or even accounting costs if your super is held in a SMSF.
In addition to increased fees, having money in accumulation and pension phases may require you to run two investment portfolios, one for each account.
This can make portfolio management, asset allocations and investment reviews more difficult.
Having all of your retirement savings within one account can allow for a more focused investment strategy.
Pension Refresh Strategy Centrelink
A pension refresh strategy can have a significant impact on Centrelink entitlements, especially in relation to grandfathered pensions.
A grandfathered pension is a pre-1 January 2015 pension where the recipient has been in continuous receipt of a social security pension or allowances since that date.
Refreshing a pension will cause a grandfathered pension to cease, meaning that the new pension is assessed by Centrelink under the deeming rules.
Depending on the level of super pension income being withdrawn, this could be either detrimental or advantageous.
Simply put, if a high pension income is being drawn down (in proportion to the pension balance), it may be better for the pension to be assessed under the deeming rules.
If a low or medium level of pension income is being withdrawn, retaining a grandfathered pension is often more favourable.
In saying this, each situation should be specifically assessed.
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To do this, the Centrelink assessable income of a grandfathered pension should be calculated and then compared against what the assessable income would be if the balance was deemed instead.
This can be calculated using the deductible amount formula and the Centrelink deeming rates.
The information to complete a deductible amount calculation can be found in a Centrelink schedule obtained from your pension provider.
Another consideration of a pension refresh strategy for Centrelink purposes relates to people under Age Pension age.
While under Age Pension age, any balance in accumulation phase is not assessed for social security purposes.
Adding more to a pension account through a pension refresh strategy will result in a greater level of assets becoming assessable under the income and assets tests.
Recontribution Strategy Calculator
The superannuation recontribution strategy calculator below can help calculate how a pension refresh strategy can reduce the taxable component and increase the tax-free component.
An example of a recontribution strategy can be found here.
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