Tax-free super: what happens when I start a pension just before turning 60?

Q: I will be 60 in March 2013. Is the compulsory 3% drawdown from my super pension treated on a pro-rata basis for my tax return for the 2012/2013 year, or can I draw it down after March 2013 rendering my super income after 60, tax-free?

You ask a popular question relating to tax-free super for over-60s, and the timing of superannuation pension payments in the financial year when an individual turns 60. For the benefit of other readers, at the end of my response, I also explain the minimum pension payment rules that you refer to in your question.

Aged 60 or over: When an individual accesses super benefits upon retirement, he or she can take a lump sum or a superannuation income stream (the official name for a superannuation pension). If an individual is aged 60 or over when receiving a super benefit, regardless of whether it is a lump or pension, those benefits will be tax-free. The one exception to this tax-free bonanza is where an individual is a long-term public servant and they receive ‘untaxed’ super benefits – some tax applies to ‘untaxed’ benefits’ received on or after the age of 60.

Under the age of 60: If an individual is under the age of 60, then tax is usually payable on super benefits. If your super benefit includes a ‘tax-free component’ then no tax is payable on this component of a benefit even when an individual is under the age of 60. I explain the tax rules for super benefits received before the age of 60 in the SuperGuide article Retirement: Taking benefits before the age of 60.

In your question, you’re asking what happens in the year that someone turns 60, if they’re already started a superannuation pension. Do they have to take payments evenly throughout the year, so some pension payments are made before the age of 60, and then taxable? Or, can they wait until they turn 60 before making the minimum pension payments, so all super benefits for that financial year are free of income tax.

According to the pension payment rules, provided the minimum pension payments are made during the financial year, it doesn’t matter whether the minimum is met in a single or multiple payments, or paid at the beginning, the middle or the end of the year. In short, in the year an individual turns 60, they can delay taking pension payments until they turn 60 in order to take advantage of the tax-free super rules.

If an individual chooses to take some pension payments before the age of 60, then those benefit payments are likely to be taxable. Note that the tax-free component of a super benefit is tax-free before or after the age of 60.

For the benefit of other readers I will now explain the context of your question. The compulsory 3% drawdown that you’re referring to is the temporary minimum annual payment factor for an account-based pension for an individual aged under the age of 65 (that is, for individuals aged from 55 to 64). Note that for the 2011/2012 and 2012/2013 financial years, the minimum payment factors have been reduced by 25%, which means that the minimum pension payment for an individual under the age of 65 is 3% for these two financial years. For example, Michael, aged 60 has $500,000 in his account-based pension account as at 1 July 2012. Under the usual rules, his minimum pension payment/s for the financial year must be 4% of his account, or $20,000, although for the 2012/2013 year, his minimum pension payment must be 3% of his account ($15,000).

Note: For the 2010/2011, 2009/2010 and 2008/2009 financial years, the minimum payment factors were halved due to the effects of the global financial crisis (GFC). I explain the minimum payments rules applicable for the 2012/2013 year (and the 2011/2012 year), including the payment factors for other ages, in the article What a relief! Minimum pension payments reduced by 25% for 2011/2012 and 2012/2013 years.