Can I save tax by withdrawing and reinvesting $500,000 of my super?

My wife and I are 85. We both receive a part Centrelink age pension of $790 per fortnight. Additionally, I have $490,000 in a superannuation fund and $2000 in a bank account. The super is not in pension mode but is designated for my spouse if I pass away first. I am considering transferring the super funds to my bank account. Would my pension combined with bank interest mean I would then have to pay income tax? I look forward to your guidance. My current super fund yields about 4 per cent.

Given the relatively low returns on your superannuation, likely because it’s still in accumulation mode and subject to a 15 per cent tax from the first dollar earned, it could be beneficial to withdraw it tax-free and invest elsewhere. If you earn 5 per cent and invest jointly, your assessable income would be $12,250 each, plus your pension of $20,540 each, totalling $32,790 a year each.

If your super account isn’t earning enough, it could be wise to reinvest it elsewhere.Credit: Simon Letch

With the Senior Australians and Pensioners Tax Offset and the tax-free threshold, tax liability is significantly reduced. Married pensioners eligible for the tax offset generally pay no tax on individual incomes up to about $31,888 each, with offset benefits gradually tapering for combined incomes up to $87,620.

Based on this, your tax should be no more than $260 each – much less than what you’re likely paying unknowingly in accumulation mode.

If a person has $1.8 million in super all in pension mode, and they do a re-contribution strategy by withdrawing and then recontributing $360,000 to reduce the taxable component, how does this affect their transfer balance cap?

There is effectively no impact to the transfer balance cap (TBC), on the assumption that $360,000 is withdrawn as a lump sum (rather than pension payment) from the pension. This creates a “debit” of $360,000 for TBC purposes.

Married pensioners eligible for the tax offset generally pay no tax on incomes up to about $31,888.Credit: Glenn Hunt

The $360,000 is recontributed as a non-concessional contribution into super and is then moved into pension phase. This creates a “credit” of $360,000 for TBC purposes.

The debit and credit of the same value effectively cancels each other out, leaving the existing transfer balance account balance unchanged.

If you are receiving the age pension, how does Centrelink deal with a change of circumstances? For example, if you have been assessed under the income test but then suddenly inherit a high number of assets, does Centrelink decide to re-assess you under the assets test? Or if you have previously been assessed under the assets test, but you now earn a high income, will Centrelink re-assess you under the income test?

You are required to advise Centrelink whenever you have a material change in your assets or income. You are then assessed under both an assets test and an income test, and the one that gives you the least pension is the one that Centrelink uses.

Just keep in mind that if you are asset tested, your assessable assets include non-financial assets such as furniture and vehicles. Make sure you value them at garage sale prices, not replacement value.

Recently, you responded to a question from a 65-year-old about whether he could contribute money to his super fund by taking funds from his 69-year-old wife’s super retirement account. You suggested that doing so would increase her Centrelink pension. However, wouldn’t any funds withdrawn from her account be considered “gifting” and thus be assessed as part of her assets for the next five years? If I’ve misunderstood, I’d appreciate clarification, as I’m concerned I may have been overly transparent with gifts I’ve made to my daughter.

You are partially correct – money transferred from one partner to another is not subject to the gifting rules because the couple’s total assets is the figure used when assessing pension eligibility. However, money transferred to other people such as your daughter are subject to the gifting rules.

Noel Whittaker is the author of Retirement Made Simple and other books on personal finance. [e-mail]

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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