What to consider if you plan to retire this year and start a super pension

Be aware of the work test when timing tax-deductible contributions

If you are approaching age 67 and hoping to make some last-minute concessional (tax-deductible) super contributions to boost your super retirement balance, you may need to get a wriggle on.

If you’re under 67 and retiring, you can make voluntary contributions, both concessional and non-concessional, to your super without needing to meet the work test.

Following the repeal of the work test from 1 July 2022, you can still make most types of personal contribution, including non-concessional and salary-sacrifice contributions, until you turn 75. You may also be able to use the bring-forward contribution rules to make a larger contribution (see section below).

Unfortunately, the work test was not entirely removed. If you wish to make a personal contribution for which you intend to claim a tax deduction and you are aged between 67 and 75, you still need to meet the work test.

Under the work test, if you are over 67 (but under 75) you must work 40 hours in any 30 consecutive days in the current financial year before you can make a tax-deductible personal contribution into your super.

If you don’t meet the current requirements of the work test and want to make a tax-deductible contribution, there is an exception that may help.

Under the work test exemption, if your total super balance (see next section) was less than $300,000 on 30 June in the financial year before you retire, you can make tax-deductible contributions up to the annual $27,500 concessional contributions cap, in the first financial year after you retire. This is designed to give retirees more time to arrange their finances.

Mind your total super balance before making extra contributions

Your ability to make super contributions in the run-up to retirement will also depend on your total super balance (TSB).

If your total super balance at 30 June 2023 was $1.9 million or more, your non-concessional contribution cap for the 2023–24 financial year is zero. You can’t make any after-tax contributions without exceeding the non-concessional contribution cap.

The bring forward rule for non-concessional contributions is also modified if you have a high TSB. In 2023–24, if you wish to contribute the maximum $330,000 permitted in one year using bring forward, you must have had a total super balance on 30 June 2023 of less than $1.68 million and must not already be in an active bring-forward period.

A higher TSB means a modified bring-forward rule.

As mentioned earlier, age restrictions for using the bring-forward measure have been loosened. Following the repeal of the work test from 1 July 2022, the rules for using a bring-forward arrangement were extended to people aged up to 75, bringing them into line with the work test rules.

Just to complicate matters, a different TSB limit applies if you want to take advantage of the carry-forward rule.

If you have unused concessional (tax-deductible) contribution caps from previous financial years you may be eligible to carry them forward to the current financial year in addition to your annual $27,500 limit. To take advantage of these catch-up contributions, your TSB must have been below $500,000 on 30 June the previous financial year. 

A high TSB doesn’t restrict you from making concessional contributions using the standard annual cap, only your access to the carry-forward rule.  Even if your TSB is above the general transfer balance cap of $1.9 million, you may continue to make concessional contributions. Remember that to make personal tax-deductible contributions you must be under age 67 or meet the work test.

Yes, it’s complicated, so it’s extremely important to seek professional advice before you act.

Don’t confuse your total super balance with the transfer balance cap

There are times when trying to make sense of the super rules can make you feel like Alice in Wonderland falling down the rabbit hole. And this is one of them.

The transfer balance cap (TBC) is the maximum amount of super you can transfer into a tax-free pension account. From 1 July 2023, the general TBC is $1.9 million. If you commenced a retirement income stream prior to 1 July 2023, you have your own personal TBC that you can find using ATO online services via myGov (or by calling the ATO).

If the $1.9 million figure sounds familiar, that’s because of the restrictions it places on non-concessional contributions, discussed above. People with a total super balance equal to or higher than the general transfer balance cap on 30 June have a non-concessional contribution cap of zero the following financial year.

There is however no ‘cap’ on your total super balance. Contribution caps limit how much you may contribute to super, but there is no limit on how much you may accumulate.

If the balance you have in super when you retire is more than the TBC, you have options. You can transfer any amount up to your TBC into a retirement income stream (super pension). The excess can be kept in your super accumulation account where earnings are taxed at a maximum of 15%, be cashed as a lump sum, or a combination of both.

Making extra contributions after you start a pension

The real benefit of starting a super pension as soon as possible is the tax-free nature of pension earnings and withdrawals. The downside is that once you start a super pension you can’t tip any more money into it.

That’s not the end of the story though. If you want to make additional contributions down the track you can ‘commute’ your pension. That is, you can stop your pension, make additional super contributions and restart your pension. Or you could open a new super account, contribute to that, and start a second pension with the balance. Either way, you need to make sure the total amount you transfer into the retirement phase remains under your transfer balance cap.

This could be a useful strategy if, for example, you decide to boost your retirement income by downsizing to a smaller home.

Making the most of downsizing

If you’re retiring this year but your age or total super balance will preclude you making any additional non-concessional super contributions, there is another way.

If you’re thinking of downsizing, you can contribute up to $300,000 of the proceeds from the sale of your family home into your super. This means couples can contribute up to $600,000 combined.

The downsizer measure is designed for people who are 55 or older. Unlike most other super contributions, there is no age limit or work test requirement. This makes downsizer contributions one of the few options available to people aged over 75 to boost their super.

Downsizer contributions are not subject to the $110,000 annual general non-concessional cap and can be made even if your total super balance was higher than the general transfer balance cap on the prior 30 June. 

If you use a downsizer amount to start a pension, it is counted towards your transfer balance cap.

Consider a recontribution strategy

If you are planning to retire soon, you may benefit from a recontribution strategy to maximise the tax-free portion of your super benefits that pass to your beneficiaries after your death.

Just as the label says, a recontribution strategy involves withdrawing a lump sum from your super and then recontributing it to your super account, after paying any necessary tax. This allows you to reduce the taxable proportion of your super account and increase the tax-free component.

You could also choose to contribute the withdrawn amount to your spouse’s super account, subject to the usual contribution limits. This can be beneficial if your super balance is above the transfer balance cap of $1.9 million in 2023–24 and your spouse has a lower super balance. That way, the two of you combined could maximise the amount you transfer into your retirement phase pensions.

To be eligible to withdraw a lump sum from your super you must be between your preservation age and 75.

Turning 60? Consider hitting pause on pension withdrawals

If you’re 59 and plan to retire this financial year, it may be worth delaying the start date of your super pension until after your 60^th birthday.

That’s because pension withdrawals are tax free from age 60. If you start your pension between your preservation age and 60 there may be some tax payable on your pension income.

The decision will depend on your immediate retirement plans and how much money you need before you turn 60. Perhaps you have a partner who is 60 or older and can withdraw from their super to finance expenses until you have your birthday.

Remember, you also have access to the low-rate cap for lump sum super withdrawals. This low-rate cap is the lifetime amount you can withdraw as a lump sum between your preservation age and 60 that is tax free. Currently, the low-rate cap is $235,000. You might consider withdrawing a tax-free lump sum below this limit to tide you over until you start your pension after your birthday.

The bottom line

As you can see, the rules around retirement and starting a super pension are complex and often confusing.

If you’re about to retire and haven’t sought independent financial advice, now could be a good time to do so.