- Getting your super benefit: Meet a condition of release
- Withdrawing your super benefit
- Lump sum or income stream: which is better?
- Limits on income stream amounts you can access
- Temporary residents and accessing your super benefits
- Tax time: Here’s what you need to know about your tax return
- Age Pension and super benefits: how do they interact?
When it comes to the super system, reaching age 60 triggers an important change. It means you can withdraw you super benefits and most people pay no tax on their savings.
This represents a big change from the tax position if you withdraw your benefits before age 60 where tax is payable on some parts of your super benefit.
A big attraction of taking your super benefit is that not only is your benefit free of any benefit payments tax, it’s also free of income tax if you take it as an income stream. This means your pension payments aren’t added to your assessable income if you are still working, or have other sources of income. The two exceptions to this general rule are explained later in this article.
To help you understand what can be a complex area, SuperGuide has put together an overview of the rules for super fund members withdrawing their benefits on or after their 60th birthday.
Getting your super benefit: Meet a condition of release
There are strict rules governing your ability to access your super, as the super system is designed to provide you with income in your retirement. Once you reach age 60 it’s more straightforward to access your super benefits, but you still need to meet a condition of release. At this age, common conditions of release include retiring from the workforce or starting a transition-to-retirement pension.
Note: You can access your super when you reach age 65 even if you have not retired, as reaching this age is considered a condition of release. This allows you to access your benefit, which can be paid as either a super pension or a lump sum.
For more information, see SuperGuide article When can I access my super? All conditions of release explained.
Withdrawing your super benefit
Once you satisfy a condition of release and become eligible to access your super savings, you have a number of options. This includes leaving some or all of your savings in your current super fund and allowing it to continue growing. Even if you take some of your account balance as a lump sum, most super funds are happy to continue looking after your remaining retirement savings.
Many super funds offer a range of super pension accounts to fund members when they reach retirement and these offer a wide choice of investment options. If you are satisfied with your current super fund, this may be a good option to consider.
When you meet a condition of release and apply to access your super benefit, you can generally choose to withdraw your super as an income stream, lump sum or a combination of the two, but it’s worth noting that for some people, the option they choose will have an impact on the amount of tax they pay (see later in the article).
- Income stream (super pension or annuity): If you decide to take a super income stream, you will receive a series of regular payments from your super fund. These must be paid at least annually and must meet minimum annual payment rules.
- Lump sum: This is a single payment that withdraws some or all of your super. It’s important to remember if you take a lump sum the money is no longer within the super system and if you then invest it, any return on your investment will not be taxed as super savings. This means the concessional tax rate of 15% on your super account’s investment earnings will no longer apply. If you invest your super benefit outside the super system, investment earnings are taxed at your marginal or top tax rate, which can be as high as 45% (plus the Medicare levy). These investment earnings need to be declared in your income tax return.
Lump sum or income stream: which is better?
Unfortunately, there is no easy answer to this question, as it depends on your personal circumstances and age. However, if you are aged over 60 and take a defined benefit pension, your decision will make a difference to the amount of tax you pay.
If you are aged 60 or over and decide to take a lump sum, all your lump sum benefits are tax-free.
If you are aged 60 or over and decide to take a super pension, all your pension payments are tax-free UNLESS you are a member of a small number of defined benefit super funds, or you receive a defined benefit pension over a certain limit. In these two situations, you will pay some tax on your super pension, but this generally only affects public servants.
These two exceptions only affect people who choose to take a super pension AND are:
- members of an untaxed super scheme (usually a public sector fund)
- receiving a private or public defined benefit pension of more than $100,000 a year (in 2018/2019).
Most super funds pay tax for their members each year, so they are referred to as taxed super funds.
If you are aged 60 or over and receive your super benefits from an untaxed super fund, you may have to pay some tax when you access your super benefit as your super fund has not already paid tax on your behalf. The amount of tax payable is generally less than if you applied to receive your benefits under age 60.
Defined benefit pensions
From 1 July 2017, the government introduced a new rule that if you apply to receive a defined benefit pension that exceeds the defined benefit income cap ($100,000 in 2018/2019), you will pay PAYG withholding tax on 50% of the amount over the defined benefit income cap. This amount is not eligible for the pension tax offset.
The defined benefit income cap is equal to the general Transfer Balance Cap ($1.6 million in 2018/2019 and 2019/2020) divided by 16.
Limits on income stream amounts you can access
There are some important rules governing income streams you need to bear in mind when accessing your super benefit:
1. Minimum pension payments
If you decide to take a super pension, you must receive regular pension or income steam amounts at least annually and these must comply with the rules for minimum pension payment amounts.
There is no maximum amount you need to take other than the balance of your super account, unless it is a transition-to-retirement pension not in the retirement phase. In this case, the maximum amount is 10% of the account balance.
The minimum pension payment amount for an account-based pension is a set percentage of your account balance at commencement, or at 1 July for every subsequent year.
If you are aged under 65, the minimum percentage withdrawal is 4%, while for ages 65 to 74 it is 5%. The percentage continues to increase as your age increases.
2. Transfer Balance Cap (TBC)
The TBC applies from 1 July 2017 and is a limit on the total amount of super savings you can transfer into the ‘retirement phase’ to pay a super pension like an account-based pension. The TBC is set at $1.6 million for 2018/2019 and 2019/2020 and is indexed in line with the Consumer Price Index.
Under the super rules, you can commence multiple super income streams in retirement phase as long as you remain below the TBC. All your super income streams in retirement phase are included and it does not matter how many super accounts or funds you have.
Temporary residents and accessing your super benefits
If you have worked in Australia as a temporary resident and apply for a Departing Australian Superannuation Payment (DASP), you may have to pay tax on your super benefit.
From 1 July 2017, if you are a working holiday maker, the entire taxable component in your super benefit is taxed at 65%.
If you are a non-working holiday maker, the taxable component is taxed at 35% for the taxed element and 45% for the untaxed element of your super benefit.
Tax time: Here’s what you need to know about your tax return
Generally, most lump sums do not need to be included in your income tax return as the ATO will have received the information from your super fund, but you should always check with your tax agent or accountant before lodging your first income tax return after receiving the lump sum.
Although super pension payments are tax-free once you are aged 60 and over (other than the two exceptions noted above), you may still need to declare them in your tax return. Depending on your age and the type of income stream you receive, you may need to declare some elements of each income stream.
You also need to declare any non-super income you earn in your tax return as assessable income. As your super pension payments are generally tax-free, however, any non-super income you earn on top your tax-free super pension is often insufficient to result in a big tax bill.
Patrick is aged 62 and receives $80,000 a year in regular pension payments from his taxed super fund. He also works two days a week as a consultant for a legal practice, earning $18,000 in non-super income in 2018/2019.
As the $80,000 is from an account-based pension, all of Patrick’s payments are tax-free. The $18,000 he earned during 2018/2019 is below the threshold for paying any income tax, so his tax bill in 2018/2019 is zero.
Age Pension and super benefits: how do they interact?
Taking either a lump sum or an income stream from your super account can affect your entitlement to either a full or part government-funded Age Pension.
From 1 July 2017, the qualifying age to apply for the Age Pension increased to 65 years and six months. The qualifying age will increase by six months every two years, reaching 67 years by 1 July 2023.
Once you reach Age Pension age, both your income and assets are assessed to determine if you are eligible for an Age Pension. If you have withdrawn your super benefits as either a lump sum or an income stream, they are counted under the assets and income tests.
For more information, see SuperGuide article How superannuation affects the Age Pension.
Important: The way the income and assets test applies to super benefits is quite complex, so it can be sensible to seek advice from an independent financial adviser before applying to withdraw your super benefit. You can also check the Department of Human Services website for more information on how super benefits are assessed under the income and assets test.