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Forward Thinking Magazine : April 2011
5 0% 5% 10% 7.36% pa 15% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 16.5% 31.5% 38.5% 46.5% Pension wins above the line Accumulation wins below the line Gross returns (after fees) Tax free percentage Accumulation or Pension? Age55to59 The chart below illustrates the circumstances in which a client aged from 55 to 59 inclusive on a particular tax rate might expect this NCC TTR pension strategy to produce a better result than simply staying in accumulation phase. Each line represents a typical tax rate. That is, the rates chosen are the normal tax brackets plus the medicare levy but ignoring the flood levy. The annual amount withdrawn is 4% of the account balance. The pension strategy wins if the combination of the relevant gross fund return and tax free component percentage of the client’s account are plotted above the line. You will see that if the earnings rate (net of fees, inclusive of franking credits) is 7.36% pa (an assumption we often use) then someone paying tax at the 38.5% rate would be better off adopting the Assumptions: - Turnover – 20% of capital gains are realised pa as discounted capital gains - Pension payments and NCC contributions are made in the middle of the year - Earnings – 38% income, 62% capital gains pension strategy if their tax free component was more than 27.3% of the relevant account balance. Bear in mind, however, that a higher percentage of tax free component would be needed for this strategy to win in the 2011/12 year to cover the flood levy as it will increase the tax rate applicable to the taxable component of pension payments. (On the other hand, in some circumstances it is arguable that clients may elect to draw some of the minimum as a lump sum benefit which could reduce the overall tax payable if the amount is within the lump sum low rate cap - currently $160,000, increasing to $165,000 in the 2011/12 year. Again the flood levy may be relevant, though: the levy will apply to the taxable component of any amount taken as a lump sum benefit even if within the low rate cap.) Chart 1. Pensions and Contributions MAStech