When you retire early, you’re going to have to make a few decisions. The tax implications of your retiring before the age of 60 can depend on whether you take your super as a lump sum and/or pension.
Are you taking your super as a lump sum, a super pension (also known as a super income stream) or a combination of both?
Note: Remember that you must also satisfy a condition of release to access your super benefits before the age of 60, and more generally, to access your super benefits before the age of 65. A condition of release includes retiring after reaching your preservation age; or taking a transition-to-retirement pension (gives you access to up to 10% of your super benefits each year); or suffering a permanent disability, to name a few.
Turning 65: Reaching the age of 65 (with or without retiring) is automatically a condition of release (except for some older super funds offering defined benefit pensions, which may require you to also retire to access a super pension).
Preservation age: Your preservation age depends on your date of birth. If you were born before July 1960, your preservation age is 55 years. Anyone born on or after 1 July 1960 has a preservation age of at least 56 years, and up to 60 years, depending on date of birth. For information on your preservation age see SuperGuide articles Accessing super: What is my preservation age? and Accessing super: Preservation age moving to 57 years.
Lump sum only
When you take all of your superannuation as a lump sum, you pay your concessional rate of super benefits tax (if any) and leave the super system.
Super benefits can be made up of two components
- tax-free component
- taxable component.
If you receive a superannuation lump sum on or after your preservation age, and before the age of 60, you can take advantage of the low-rate cap, an indexed lifetime limit that applies to your taxable component. You can receive up to $195,000 (for the 2016/2017 year), or $200,000 (for the 2017/2018 year) of your taxable component tax-free, provided your component is a taxed element (the taxable component of your super benefit will be a taxed element, unless you’re a long-term public servant who is a member of an older public sector super scheme).
If you retire on or after reaching your preservation age, you can receive up to $195,000 (for the 2016/2017 year), or $200,000 (for the 2017/2018 year) of the taxable component of your lump sum, tax-free. The $195,000 (or $200,000) low-rate cap is in addition to any tax-free component making up your super benefit. If your superannuation lump sum includes a tax-free component, you also receive that part of the benefit tax-free.
Note: Note that the single low-rate cap applies to all benefits received over your lifetime, rather than a fresh limit applicable for each benefit payment. If you have withdrawn super benefits in the past, you may have used up some, or nearly all, of your low-rate cap of $195,000 (for the 2016/2017 year), or $200,000 (for the 2017/2018 year), or $195,000 (for the 2015/2016 year), or $185,000 (for the 2014/2015 year), which means you may have to pay tax on the taxable component when you take additional lump sums.
Note: If you receive a superannuation lump sum on or after the age of 60 (except for super lump sums from an untaxed source), then that lump sum is tax-free (for more information about the tax treatment of super benefits for over-60s, see SuperGuide article Tax-free super for over-60s, except for some (from 1 July 2017)).
For a schedule of the tax treatment of superannuation lump sums received before the age of 60, see SuperGuide article Retirement: 3 ways of taking super benefits before the age of 60.
Super pension only
By putting the right structure in place and choosing an appropriate superannuation pension, you can avoid paying tax altogether when taking super benefits before the age of 60. Further, any earnings on assets used to finance your super pension are tax-free.
Note: The introduction of a cap on the amount of super that can be transferred to pension phase has complicated the tax treatment of super, especially for those Australians receiving benefit payments from transition-to-retirement pensions (TRIPs), and those receiving payments from defined benefit pensions. For more information on the $1.6 million transfer balance cap and also the changes to the rules applying to TRIPs, see the following SuperGuide articles:
- Burden for retirees: Monitoring $1.6 million transfer balance cap
- Super pensions: Reviewing the merits of keeping a TRIP
- Defined benefit pensions and the $1.6 million transfer balance cap
Lump sum and super pension
You can have the best of both worlds. You may receive tax-free lump sums from your benefit’s taxable component, totalling up to $195,000 (for the 2016/2017 year), or $200,000 (for the 2017/2018 year). You can receive even more super as a tax-free lump sum, if your benefit includes a tax-free component.
You can also start a super pension (income stream) before the age of 60 (subject to satisfying the minimum payment rules), which enables you to access a 15% tax offset on the pension payments you receive (assuming you have reached your preservation age). The 15% pension tax offset does not apply to super pensions started before preservation age, or if the super pension is from an untaxed source (certain public sector funds).
Note for public servants: If you are, or were, a long-term public servant, you may receive part of your super as an ‘untaxed benefit’. An untaxed benefit is a benefit that hasn’t been subject to contributions tax or earnings tax, while a ‘taxed benefit’ has been subject to contributions and earnings tax. Some public sector superannuation schemes (now closed to new members) haven’t paid these super taxes on employer contributions that are in excess of Superannuation Guarantee contribution requirements. This is because the additional employer contributions aren’t paid by the federal government until the benefit is payable. Untaxed benefits paid from such schemes are then hit with a higher tax when paid out as super benefits (when the government finally hands over the cash), to recoup the super taxes. If you belong to an ‘untaxed’ super scheme, then check with your super fund about your entitlements.
For more information on how your super benefits are taxed when withdrawing super before the age of 60, including a handy summary table of applicable super taxes, see SuperGuide article Retiring before the age of 60: the tax deal from 1 July 2017.
For more information on the $1.6 million transfer balance cap and also the changes to the rules applying to TRIPs, see the following SuperGuide articles: