Pros and Cons of closing super

Hi all, Long time lurker, first time poster.

I have the following hypothetical scenario which I am seeking feedback about the pros and cons for (not looking for advice)

Elderly married couple, both late 70’s, good health, own their own home, $390k in super (combined) in the same retail fund, within which they have an 80% allocation to cash (their choice). Paying about $8,500 per year in fees.

Assuming that they (or perhaps through their EPoA) were willing to manage this amount of money outside of super, what would be the pros and cons of simply withdrawing the lot out of super and saving on the fees? The thinking is that they could split the sum and invest half the amount, $195k, in each of their names.

The couple would receive the full aged pension, since $390k is beneath the taper threshold for a home-owning couple. They could also continue to invest in cash/term deposits if they really were insistent, but if they put aside a smaller cash buffer and invested the rest in Australian equity ETFs or LICs, their taxable incomes would still each be comfortably below the zero-rate threshold.

From a tax perspective, am I right in thinking there is not much difference to having this sum of money invested like this outside of super, compared to in, except for there being potential capital gains tax liability when they eventually sell if they invest outside? What are the pros and cons here in addition to what I have listed below? I realise that if they invest in the market, there is the associated volatility (and the potential loss of capital at a time when they may need it) to consider, but I am not thinking of that as a pro or a con, it's just the nature of markets they would need to consider their appetite for.

But can anyone add to what I have listed as the pros and cons below?

PROS.

- No more fees, except for those associated with brokerage and expense ratios of ETFs/LICs, if they choose to make those sort of investments
- Avoids the “death tax” issue associated with the taxable component of the super

CONS.

- Capital gains tax would be payable on any ETF or LIC investment, although this could be minimised, possibly to zero, by choosing carefully when to sell parcels.
- They would each have to complete a tax return each year.

 

There are estate planning implications as on death their super benefits could end up in a different place to their personal assets. There may also be tax differences between taking super now and leaving it in there at the point of death.

 

2.17% fees on $390k? Ouch. The couple need sound structuring advice. A consult with @Terry_w is in order.

 

Option - roll over to a low fee fund rather than a retail fund? Why are they paying $8,500/yr.

Although it may be a non-issue, income generated from within the super will be tax free - this may not make a difference as they are probably below the tax threshold.

 

Are they still in accumulation phase or pension phase? Your post is unclear

Why persuade LICS etc outside of super but not inside?

As Terry says, there are estate planning implications if the “super” goes to a beneficiary that is not the spouse (17% tax)

Those fees, ouch! Change to a low cost fund and there is a large saving straight away

Lastly, what income do they need ??

 

Thoughtful, provocative follow-up questions - thank you all.

They are both in pension phase super (so a zero rate tax environment). They live comfortably on about $50k per year, i.e., an extra ~$14k on top of the full aged pension.

By peoples' various references to the estate planning implications, am I correct in assuming this is referring to the fact that non-dependent beneficiaries pay tax at their marginal rates (minus the tax credit) for any taxable component of superannuation that they receive? This is what I meant in the reference to the "death tax" (which I know is a misnomer) but if I am missing something, by all means am happy to be educated. @Terry_w?

Everyone seems to have picked up on the outrageousness of the fees. @Scott No Mates identifes what I had thought of as a half-way house, ie.,rolling over to a lower cost fund. But my thinking was, if they remain (against all reasoning to the contrary, but I accept fully that this is their choice) so insistent on maintaining such a big cash component, why not just roll one step further, and out of super completely. They are still going to be in a zero-tax environment as far as their income is concerned, and with zero fees as well

 

There are basically 2 components of super which will be taxed differently.

Tax Tip 144: Taxation of Super on death Tax Tip 144: Taxation of Super on death

 

Crystal clear. Thanks @Terry_w

 

$8500 in fees on $390K ??? Thats 2.18%. A term deposit may get 1.5% so you may be backwards on earnings. The fees would likely elimiate any earnings.

I wouldnt race into a withdrawal but taking from super and investing personally may not involve tax as each taxpayer can theoretically earn $21K BUT if you presently get ANY pension income you may need to check what the deeming impact could be on this extra income. Centrelink can advise on that - no cost. Just discuss estimates. Taking from super will cut the fees and may even avoid death benefits being taxed by your estate beneficiaries (adult kids ? etc) at 15-17% Consider how the $$ is invested so you dont force all the income into one taxpayer and $0 to the other.

Now that forfeiture of refundable franking credits has faded a strategy to consider is also refundable franking credits on some but weigh up your risk tolerance to a market correction. refundable franking doesnt need a tax return - You can fill out a simple form Or do it through MyGov.