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: Your question is really four questions in one so I will split my response into four parts:
- How are super benefits taxed?
- How can you ensure your super fund’s earnings are exempt from tax?
- What is the minimum pension payment amount that must be withdrawn?
- What if I fail to withdraw the minimum pension amount each year?
The minimum pension payment rules are also explained at the end of the article.
How are super benefits taxed?
When an Australian retires, they encounter two types of tax-friendly super. Firstly, if a person withdraws part or all of their super benefits on or after the age of 60, they can expect to pay no super benefit payments tax or income tax on their super benefits. From the age of 60, tax-free status applies to lump sum super benefits or pension payment benefits paid from most super funds (with the exception of some super benefits paid from public sector funds).
Secondly, if a person starts a superannuation pension, then the earnings on the assets financing the 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 have reached at least preservation age to be able to start a super pension – for more information about preservation age see SuperGuide article Accessing super: What is my preservation age?).
Important: From 1 July 2017, the government is removing the tax exemption on earnings from assets financing transition-to-retirement pensions (for more information, see SuperGuide article Less tax, more super? A transition-to-retirement pension is no longer the answer ). Ordinary super pensions will continue to enjoy a tax exemption on asset earnings, although from 1 July 2017, there will be a $1.6 million cap on the amount of super that can be transferred to pension phase (for more information, see SuperGuide article Burden for retirees: Monitoring $1.6 million transfer balance cap.
If a person wants their super pension account earnings to be exempt from tax, they must withdraw a minimum amount each year (minimum pension payment rules are explained later). Note that if a person is aged 60 years or over, the actual super benefit payments a person withdraws will be tax-free regardless of whether they start a pension or take a lump sum.
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 when the person is under the age of 60.
- Marginal tax rate may increase for benefits taken before the age 60: Although super benefits taken beforethe age of 60 are subject to special rates of benefits tax, the actual benefit paid can push a person into a higher tax bracket for other non-super income. Taking large lump sums before the age of 60 can have broader income tax implications by pushing a person into a higher marginal tax bracket.
- No pension means accumulation phase and earnings tax: If a person doesn’t want to access their super benefits, they can keep their superannuation savings in accumulation phase but then the earnings on the fund’s assets will be subject to 15% earnings tax, rather than be exempt from tax.
From 1 July 2017, Australians with more than $1.6 million in super may have to hold both accumulation and pension accounts in super. Effective from 1 July 2017, a cap of $1.6 million will be introduced, on the amount of super that can be transferred into pension phase. If you have more than $1.6 million of super in pension phase, as at 1 July 2017, then you must move some of your super benefits back into accumulation phase, and pay 15% tax on earnings from those transferred assets, OR withdraw the excess from the super system (for more information on this change see SuperGuide article Burden for retirees: Monitoring $1.6 million transfer balance cap .
In answer to the first part of your question: A person doesn’t have to withdraw their super when they retire, but if they don’t start a super pension and withdraw a minimum amount each year, then any earnings on the fund’s assets will be subject to 15% earning tax. If a person starts a super pension, then earnings on pension fund assets are exempt from tax.
Note: From 1 July 2017, transition-to-retirement pensions will lose the tax exemption on fund the pension account earnings (for more information, see SuperGuide article Less tax, more super? A transition-to-retirement pension is no longer the answer).
How can you ensure your super 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 pension assets to be exempt from earnings tax (rather than paying 15% tax on fund earnings), when a person starts a superannuation pension they must satisfy two conditions:
- 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 2017/2018 and 2016/2017 years (as was the case for the 2015/2016, and 2014/2015 and 2013/2014 years), the minimum pension payment for anyone aged under 65 is 4% of the pension account balance as at 1 July of the financial year, and 5% of the pension account balance for individuals aged 65 to 74 years. See table below for other age groups.
Important: From July 2017, if you have more than $1.6 million in pension phase, you must redirect the excess super pension assets (above $1.6 million) into accumulation phase, and pay 15% tax on earnings from those assets (OR withdraw the excess from the super system). For more information on this change, see SuperGuide article Burden for retirees: Monitoring $1.6 million transfer balance cap . For more information on the particular rules that apply to transition-to-retirement pensions (TRIPs), including the removal of the tax exemption on pension earnings from July 2017, see SuperGuide article Less tax, more super? A transition-to-retirement pension is no longer the answer.
Minimum annual pension payments (for account-based pensions)
The minimum pension payment percentage factors are listed in Schedule 7 of the Superannuation Industry (Supervision) Regulations 1994, and are set out in the table below.
|Age of pension account-holder||Percentage factors|
|65 to 74||5%|
|75 to 79||6%|
|80 to 84||7%|
|85 to 89||9%|
|90 to 94||11%|
|Aged 95 or older||14%|
Note: Amount calculated on 1 July each year, unless first year of account-based pension, and then pro-rated from commencement day. If commencement day of the super pension is on or after 1 June of the financial year, then no minimum payment is required for that financial year. Minimum amount to be rounded to nearest $10.
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 you will be forgiven for underpaying your superannuation pension in the SuperGuide article SMSF pension payments: A little bit under may be OK.