Recontribution strategies good for pensioners

Recontribution SMSF pension

SMSF members drawing a pension can still use recontribution strategies to reduce tax within their fund and for future beneficiaries.

SMSF members who are reluctant to use a recontribution strategy believing pension drawdowns will negate their effect may miss out on tax savings during their lifetime and for any of their beneficiaries, according to an SMSF expert.

Heffron managing director Meg Heffron said the ability to withdraw and recontribute $330,000 every three years up to age 75 may be rejected by some SMSF members who believe their retirement savings will be exhausted in later life and so a recontribution strategy would provide few benefits.

“I wanted to do some numbers on this because I was interested to see what happens if you always take the minimum and how much capital someone will have left 20 years on,” Heffron said during the recent Heffron Superannuation Intensive Day 2022 in Sydney.

“I adjusted for inflation and if somebody starts a pension at 65, takes the minimum every year, how much capital will they have in 20 years? They will still have half the capital, so any tax bill may be quite large.”

She presented the example of Joan, aged 65, with $1.4 million in an SMSF as demonstrating the results that a recontribution strategy can provide for SMSF members drawing down a pension.

The $1.4 million was a strong incentive to make more contributions, but did not create problems with the total super balance cap and if Joan, who was single, died at 65, her children would pay 15 per cent on the $1.4 million balance, she noted.

“At age 85, if she has not made any recontributions, Joan has only got about half the capital left and the tax bill is half as big,” she said.

“If she does make a recontribution, the first time she takes out $330,000 and puts it back in, it reduces the tax bill by 50 per cent.

“If Joan does that every three years, by the time she is 75 she has got no taxable component at all.”

She noted that without a recontribution strategy the tax would peak at 75 and start reducing, but the strategy made a marked difference compared to taking no action.

“If Joan reduced her tax to zero, there would be no tax saving because there’s no tax, and so at age 85, 20 years after she started the pension, the tax saving put in place for the kids by doing this really simple thing would be worth it for a lot of people,” she said.

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