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Forward Thinking Magazine : December 2010
24 - 100 200 300 400 500 600 700 800 55 56 57 58 59 60 61 62 63 64 65 Age Current Position Strategy 1 Strategy 2 $000 Macquarie Adviser Services Chart 1. Combined Balances - Accumulation & Pension Pros and cons The advantage of Strategy 2 is that the accumulating funds will sit in pension phase for longer, thereby benefiting more from the tax exemption on fund earnings (compared to a maximum effective rate of 15 per cent in accumulation phase). The disadvantages are that as more funds are moved into pension phase, the minimum drawdown level increases. This may have implications for clients who are under 60 in relation to the tax payable on pension income and, for clients of all ages, may lead to greater leakage of funds from the superannuation environment. Of course these issues will only be of concern for clients who are actually required to take a higher pension payment from the new pension - clients who are already drawing more than the minimum payment may not be affected. Chart 1 shows the impact of each option on the combined accumulation and pension account balances over a 10 year period (to age 65). Based on our assumptions (see later), using valuations in today’s dollar terms: If Marc was to maintain his current position, he would have a combined account balance of $634,038 after 10 years. Under Strategy 1, Marc would have a combined account balance of $695,908 after 10 years, more than $61,000 higher than if he didn’t make use of a transition to retirement pension. Under Strategy 2, Marc’s combined balance after 10 years would be $705,742, i.e. $9,834 higher than Strategy 1. Chart 2 shows the source of the difference in the combined balances between Strategy 1 and 2. This analysis highlights that the majority of the benefit in Strategy 2 over Strategy 1 arises in the period from age 60, when the TTR pension payments become tax free for Marc.