Use allocated pensions to deal with excess benefits

While it won't be an issue for most investors, there is a limit to the amount of money you can withdraw from the superannuation system at concessional tax rates. It's called your Reasonable Benefit Limit or RBL.

If you want to retain full access to your capital, you will probably want to take your benefits as cash or rollover into an allocated pension, in which case your benefits will be subject to the Lump Sum RBL.

However, if you elect to use at least half of the qualifying amount of your benefits to purchase a "complying" income stream, you can have your benefits assessed against the higher Pension RBL.

The amount by which your superannuation benefit exceeds the relevant RBL is known as an excess benefit. If you take your excess benefit as cash, it will be subject to tax at the highest marginal rate plus the Medicare levy (currently 48.5). For this reason, most investors choose to rollover the money to an income stream investment. However, an income stream or any part of an income stream that is excessive is not entitled to the full 15 tax offset (rebate).

How does the strategy work?

If you want to purchase an allocated pension which exceeds your available RBL you generally have two options:

1. Purchase a single allocated pension (which would be partially rebatable, on a pro rata basis to reflect the proportions of your benefit that are reasonable and excessive), or

2. Purchase two allocated pensions - the first of which would be fully rebatable (up to the lump sum RBL) and the second (purchased with your excess benefits) would be non-rebatable.

The advantage of segregating your excess benefit is that you can take only minimum payments from the second (non-rebatable) allocated pension to minimise your tax bill. In addition, if you need to withdraw money in a lump sum, you can do this from the first (rebatable) allocated pension and not incur excess benefits tax.