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Once you retire and transfer your superannuation into a retirement phase pension account, planning how you access your savings is extremely important.
It can create opportunities and present further options later in life to make additional super contributions and increase your retirement savings in retirement phase where the fund earnings remain tax free.
To understand why this is an important issue, we need to first revisit a few superannuation fundamentals including:
- The difference between pension payments and lump sums
- The transfer balance cap rules and how they operate
- How different super payments affect your transfer balance account.
What is a pension?
The term ‘pension’ refers to an ongoing obligation to make a series of payments from a super fund where each ongoing payment relates to the others.
For instance, if a member makes a written request to commence a pension and receive a regular payment each month from their fund, then these monthly payments would be pension payments.
The same could be said if the member elected instead to have these payments made weekly or fortnightly or even if they elect for only one pension payment annually from their fund. These would all be considered pension payments due to the ongoing obligation for the Trustee of the fund to make these payments, with each payment in the series relating to the other payments.
The key is having the appropriate documentation in place at the start of the pension.
What is a lump sum?
In contrast, a ‘lump sum’ refers to a one-off payment from a super fund on the written request of a member. Once paid, there is no ongoing obligation to make any further payments.
Once again, it is the paperwork in place at the time that will determine how payments will be treated. We will look at the paperwork expectations shortly.
How payments affect the transfer balance cap (TBC)
The next fundamental we need to look at is the transfer balance cap, a lifetime limit imposed on the superannuation savings you can move into retirement (or pension) phase. It is in this phase where the earnings that the fund earns on its assets are tax free.
This limit was originally set at $1.6 million but due to recent indexation it now sits at $1.7 million.
To track how much of the transfer balance cap you have already used, you are given a transfer balance account (TBA) that records events that are relevant to the cap, such as starting or stopping a pension.
This is where things get interesting, as not all fund events affect the calculation of your personal transfer balance account. Events that do affect the calculation of your TBA include:
- Starting a pension
- Ceasing a pension
- Lump sums that are accessed from a pension.
Lump sums taken from a pension account are added back to your transfer balance account, essentially allowing more money to be moved into retirement phase later.
Events that do not affect the calculation of your TBA include:
- Pension payments
- Fund earnings.
You can view the balance of your transfer balance account by contacting the ATO or through MyGov.
Now let’s look at an example of how the decision to withdraw retirement savings as a pension payment or lump sum can affect your transfer balance cap.
Process and procedures
As mentioned earlier, it’s the paperwork at the time of the event that is most important.
Most public super funds would have a standard form to use when commencing a pension or accessing a lump sum. Always check with the relevant fund.
Where an SMSF is already paying a pension, the required documentation needs to be in place prior to any payment being made in place:
- A member request for a pension to start. The request would often include:
- The start balance for the pension (the purchase price of the pension)
- The frequency of each pension payment
- The amount of each pension payment or a method to calculate the amount
- (In some cases) a request that the trustees treat all payments above the minimum pension required as lump sum payments, with separate documentation for these.
- A trustee resolution (minute) to action the above
Then, if there is a lump sum being taken from the SMSF, the following documentation needs to be in place prior to any payment being made:
- A member request for a lump sum payment, including the lump sum amount and from which account it should be paid (the member’s pension account or accumulation account). This article has focussed on accessing a lump sum from an existing pension account.
- A trustee resolution (minute) to action the above.
Final comments
Keep this in mind if you ever need to access money from your super that is more than you are required to take each year (the minimum pension). Consider utilising a lump sum if appropriate.
Remember that your financial position can change over time with inheritances, proceeds from downsizing your home, or the sale of other assets during retirement, so further contributions to super may be something you look at in the future. With changes to super that now allow you to make non-concessional (after-tax) contributions later in life, this is an area that affects even more Australians.
