Q: I am 63. I want to retire next year but I am not sure if I want to access my super benefits yet. I have heard that when I retire, I must withdraw some super benefits each year, otherwise I won’t receive tax-free super benefits. Can you please clarify the rules for me?
A: You question is really two questions in one so I will split my response into two parts:
- How are super benefits taxed?
- How can you ensure your fund’s earnings are exempt from tax?
The minimum pension payment rules are also explained at the end of the article.
How are super benefits taxed?
When you retire, you encounter two types of tax-friendly super. If you withdraw part or all of your super benefits on or after the age of 60, you can expect to pay no super tax or income tax on your super benefits. From the age of 60, tax-free super benefits apply to lump sum super benefits or pension income paid from most super funds (with the exception of some super benefits paid from public sector funds).
Secondly, if you start a superannuation pension, then the earnings on the assets financing your pension are exempt from tax, subject to meeting certain conditions. This tax exemption on pension earnings applies regardless of age (although most individuals need to be at least 55 years of age).
If you want your pension fund earnings to be exempt from tax, you must withdraw a minimum amount each year (minimum pension payment rules are explained later). Note that the actual super benefits you withdraw will be tax-free regardless of whether you start a pension or take a lump sum, due to being aged 60 or over.
Set out below are three important facts about super and tax that are rarely publicised:
- Tax-free component for all ages: If a super benefit includes a tax-free component, then that part of the benefit will not be subject to benefits tax or income tax, even if you’re under the age of 60.
- Marginal tax rate may increase for benefits taken before the age 60: Although super benefits taken before the age of 60 are subject to special rates of benefits tax, the actual benefit paid can push you into a higher tax bracket for your other non-super income. Taking large lump sums before the age of 60 can have broader income tax implications by pushing you into a higher marginal tax bracket.
- No pension means accumulation phase and earnings tax: If you don’t want to access your super, you can keep your superannuation savings in accumulation phase but then the earnings on your fund assets will be subject to 15% earnings tax, rather than be exempt from tax.
In answer to the first part of your question: You don’t have to withdraw your super but if you don’t, then any earnings on your fund assets will be subject to 15% earning tax. If you start a super pension, then earnings on pension fund assets are exempt from tax.
How can you ensure your fund’s earnings are exempt from tax?
If you start a superannuation pension rather than take a lump sum from your super account, your retirement savings remain within the super system. By keeping your savings in the super system and starting a pension, the investment earnings from the fund assets that are financing your super pension are exempt from tax. Sounds great, doesn’t it?
There are strings attached. For your pension assets to be exempt from earnings tax (rather than paying 15% tax on fund earnings), when you start a superannuation pension you must satisfy two conditions:
- You must ensure a pension payment is made at least once during the financial year (July to June)
- For any account-based super pension started on or after July 2007, a minimum amount is paid as pension payments to the member each financial year.
For the 2013/2014 year (and for the 2014/2015 year), the minimum pension payment for anyone aged under 65 is 4% of the pension account balance as at 1 July 2013( and as at 1 July 2014), and 5% of the account balance for individuals aged 65 to 74 years.. See table below for other age groups.
What if I fail to withdraw the minimum pension amount each year?
Since January 2013, and taking effect retrospectively from 1 July 2007, the Australian Tax Office has decided to show leniency and exercise the ‘Commissioner’s powers of general administration (GPA)’: in certain circumstances where a super fund fails to withdraw the minimum annual pension amount in a financial year, the pension account will not lose its tax-exempt status and the pension is deemed to continue, rather than cease. I explain the specific circumstances when it is okay to underpay your superannuation pension in the SuperGuide article SMSF pension payments: A little bit under may be OK.
Minimum annual pension payments (for account-based pensions)
|Minimum annual pension payments (for account-based pensions)|
|Percentage factors (PF)|
Back to normal
|2013/2014 & 2014/2015 years||2012/2013 and 2011/2012 years*||2010/2011, 2009/2010 and 2008/2009 years|
|Full PF||75% of PF||50% of PF|
|95 or older||14%||14%||10.5%||7%|
*For the 2012/2013 year and for the 2011/2012 year, the annual minimum pension payment factors were 75% of the usual factors.
Note: Amount calculated on 1 July each year, unless first year of account-based income stream, and then pro-rated from commencement day. Minimum amount to be rounded to nearest $10.
Source: Adapted from Schedule 7, Superannuation Industry (Supervision) Regulations 1994 and Federal Government news releases dated 18 February 2009, and 12 May 2009, and 30 June 2010, and 29 November 2011. Figures for 2011/2012 year and 2012/2013 year calculated by Trish Power.