Superannuation

Reader’s question: I’m 58 and planning to retire soon. I will be living off my super and other investments. Before I stop work I plan to transfer some shares I own into the super fund as after-tax contributions, which I believe is still possible.

One thing I wouldn’t mind doing is using only the proceeds from the share transfers to support my pension, which I expect will be about $200,000, because I believe such amounts can be tax-free for someone under 60, whereas other super is taxable until you are 60. Is this possible?

Deborah Wixted, the executive manager of technical services at Colonial First State, says you can transfer shares you own into your super fund as after-tax contributions following the government’s decision to delay a proposed ban on this strategy for one year – until July 2013. Under the ban, the government will require future transfers to take place through the market.

Things to bear in mind under the present rules are the after-tax contribution limits – you need to be aware of the bring-forward rule that allows you to contribute up to $450,000 over three years, so long as you didn’t contribute more than $150,000 last year.

If you did, you will have triggered the bring-forward rule and can only contribute the difference between this and $450,000.

Say you contributed $160,000 last year, your limit for the next two years will be $290,000. With your expected $200,000 from the share transfer, you should be fine.

Follow a sequence

As far as then using the after-tax contributions you plan to make to start a tax-free pension, which is possible, you will need to follow a certain sequence to allow this to happen. Before you make any after-tax transfer of shares, you’ll have to start a super pension with your existing fund balance.

This will be a taxable pension until you get to the age of 60 where the proportion of the balance that will be taxable is all the concessional or pre-tax contributions. This will be taxed at your personal tax rate less a 15 per cent rebate.

Don’t, under any circumstance, add the shares to your portfolio and then start a pension as the amount will be counted and assessed as part of the first pension.

As for the shares you transfer to the fund as an after-tax contribution, you’ll have to pay personal tax on any shares where you made a personal profit.

You can then start a pension with this 100 per cent after-tax amount where the pension payments will be tax-free.

Minimum payments

Considerations you need to note are that each pension will have to pay the minimum payment according to the age-based account balance rules. That will be 3 per cent of each account balance.

The after-tax pension, for instance, will have to pay a minimum $6000.

While you could stop your first pension and revert the balance back to accumulation, you’ll have to pay a proportional pension based on the account balance and the proportion of the year the pension is in place.

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