Financial Planning – Minimising Capital Gains
I had a question from a member asking what they should do about the huge capital gains they have on the CBA.
I am licenced to give General Advice and am not a Financial Planner. But Marcus Today is licensed by ADVICENET Pty Ltd, which is an AFSL in the Clime stable. Clime owns a financial planning group called Madison Financial, and I have reached out to them for the answer to this question - "How do you shift your Superannuation from the Accumulation phase to Pension phase, and what does that mean for capital gains on stocks currently in Super?".
Here is the article. If this is popular, I can do more of these 'Financial Planning style questions answered' articles. This also comes by way of a plug for the author. Just in case you need a financial planner.
If you have a Financial Planning question you would like answered that would suit an article, please email me. If it is of universal interest, maybe I can get it answered. No personal details please.
This article comes from Craig Muchamore, a Financial Planner. Craig is a Madison Adviser Council representative, tasked with bringing fresh insights and thinking on emerging or unfamiliar issues, responding to ideas from Madison, and providing high quality objective advice. Craig can obviously only scratch the surface here, and as usual, answering one question in this industry raises more questions than it answers. If you'd like to know more, you can contact Craig at i2 Wealth Financial Planning.
Phone number: 08 8132 6400
Craig's specialisation is "Pre-retiree and retirement financial planning strategies, investor behaviour and portfolio construction". His stated target audience is "People interested in understanding their financial position relative to their goals and, through education and advice, want to improve their wealth position".
Minimising Capital Gains on Shares: Unlocking Financial Benefits for Savvy Pre Retirees
Unlocking a path to reduce taxable capital gains can be a wise move for seasoned investors, especially as you move into your retirement years. If your shares are held as part of your superannuation, you may be able to take advantage of the distinct tax environments by transitioning your superannuation savings from the accumulation phase to the pension phase before executing the sale.
During the accumulation phase, a 15% tax is imposed on earnings and a 10% tax on realised capital gains (assuming investments are held for over 12 months). However, within the pension phase of superannuation, a remarkable advantage emerges—no tax is levied (0%) on generated income or realised capital gains.
The financial rewards of shifting your superannuation savings to the pension phase are noteworthy. Not only can you keep more of your investment returns, but you can also watch them grow tax-effectively—an enticing prospect for the wise investor.
It is important to note that specific triggers based on age allow for the transition from the accumulation phase to the pension phase. These triggers include ceasing gainful employment after reaching age 60, reaching your preservation age and retiring, or simply turning 65.
Nonetheless, transitioning from the accumulation to the pension phase differs based on individual circumstances, mainly due to the availability of this functionality with your superannuation provider.
A recent encounter with a prospective client shed light on the significance of selecting the right superannuation product. Despite the client being 66 years old and meeting the eligibility requirements to transition to the pension phase, their industry fund failed to contact them. Consequently, they accumulated a substantial unrealised capital gain within their fund.
During our consultation, we explained the potential benefits of shifting to the pension phase. These benefits included regular cash flow, tax savings, and the potential reduction of estate taxes through a cash-out/re-contribution strategy.
However, further research revealed a hurdle: the client would need to sell their shares, pay capital gains tax, transition to a pension account, and then repurchase the shares. This process entailed significant upfront costs in terms of taxes and transaction fees, as well as a temporary exit from the market—sacrificing potential capital growth.
Alternatively, if the client had held the same underlying investments (direct shares) with a superannuation provider that allowed a seamless transition, they could transfer the investments to the pension phase without incurring capital gains tax, transaction costs, or market timing risks.
In addition to achieving the client's goal of regular income from their superannuation savings, this approach could effectively address the accumulated "Death Duties" within their superannuation.
In summary, it is vital to recognise that the functionality and product benefits offered by different superannuation providers can be just as, if not more, important than the annual administration cost. When making a selection, all consequences should be carefully considered.
Of course, navigating the realm of superannuation entails considering several other factors before automatically transitioning from the accumulation phase to the pension phase:
- Personal Transfer Balance Cap: Understand the limitations on transitioning your superannuation into the pension phase.
- Liquidity: Ensure your superannuation product provides sufficient liquidity to meet the minimum pension payment requirements.
- Capital Gains Liability: Confirm if your chosen product enables the transfer without incurring capital gains tax.
- Self-Managed Superannuation Fund: If applicable, verify whether your trust deed permits such transactions.
- Making informed decisions and selecting the right superannuation provider can be the key that opens the door to substantial savings.
Link to website: Financial Planning - i2 advisory - based in South Australia.