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: 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. Tax-free super benefits apply to lump sum super benefits or pension income paid from a super fund.
Secondly, if you start a superannuation pension, regardless of age (although most individuals need to be at least 55 years of age), then the earnings on the assets financing your pension are exempt from tax, subject to meeting certain conditions.
If you want your 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, due to being aged 60 or over.
Note: If you’re under the age of 60, and your super benefit includes a tax-free component, then that part of the benefit will not be subject to benefits tax or income tax. Taking a super benefit before the age of 60 means the taxable component of the super benefit will be subject to some 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.
How do the pension rules work?
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 2 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 2012/2013 year, the minimum pension payment for anyone aged under 65 is 3% of the pension account balance as at 1 July 2012. See table below for other age groups.
Minimum annual pension payments (for account-based pensions)
|Minimum annual pension payments (for account-based pensions)|
|Regular Percentage factors||Temporary relief|
|2011/2012 and 2012/2013 years||2010/2011 year|
|95 or older||14%||10.5%||7%|
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.
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 member 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 in it is OK to underpay your superannuation pension in the SuperGuide article SMSF pension payments: A little bit under is OK.