Why timing counts if you’re planning to retire this year and start a super pension

Turning 60? Consider hitting pause on pension withdrawals

If you’re 59 and planning 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 after age 60. If you start your pension between your preservation age, currently 57, and age 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. If you’re planning a big overseas trip for example, then delaying the transfer of your super into retirement phase may not be an option.

Alternatively, if you’re heading overseas with your partner who is 60 or older and retired, they could withdraw funds for the trip from their super tax-free. You could then delay starting your super pension until after you turn 60.

For more information on accessing your super before age 60, see SuperGuide articles Your tax guide to accessing your super under age 60 and When can I access my super? All conditions of release explained.

Be aware of the work test when timing extra contributions

If you’re under 65 and retiring, you can make additional non-concessional contributions at any time without needing to meet the work test.

However, if you are 65 now and turning 66 soon you will need to meet the work test to be able to make any further non-concessional contributions.

Under the work test, if you are 65 (but under 74) you must work 40 hours in any 30 consecutive days in the current financial year before you can tip more money into your super.

There is an exception though…

If your total super balance was less than $300,000 at June 30 in the financial year before you retire, you can make after-tax contributions up to the $100,000 non-concessional cap in the first financial year after you retire. This is designed to give retirees more time to arrange their finances.

If you don’t qualify for this exemption, Graeme Colley, Executive Manager of SMSF technical and private wealth at SuperConcepts says, it may be necessary to hold off making additional contributions to your super until July 2020.

Although not yet legislated, it’s proposed that from 1 July 2020 Australians aged 65 and 66 will be able to make voluntary super contributions, both concessional and non-concessional, without meeting the work test.

For more on the work test see SuperGuide article Work test: making super contributions over 65.

Mind your total super balance before making extra contributions

Your ability to make additional voluntary super contributions in the run-up to retirement income will also depend on your total super balance (TSB). Once your super balance hits $1.6 million you won’t be able to make any further non-concessional contributions.

If you think your total super balance is near $1.6 million, Graeme Colley suggests making non-concessional contributions this year.

“Say your total super balance was $1.59 million at 30 June 2019, then that allows you to put in additional non-concessional contributions this financial year. In the 2020-21 financial year you won’t be able to make any further contributions,” he says.

This is especially the case if you want to take advantage of the bring-forward rule which allows you to make three years’ worth of non-concessional contributions, or up to $300,000, in one financial year.

You can’t access the bring-forward rule once your total super balance hits $1.6 million. There are also age restrictions. Under current rules you can’t use the bring-forward rule once you turn 65 unless you meet the work test, but in the 2019 Budget the government announced it plans to extend eligibility to people aged 65 and 66.

For more on the bring-forward rule see the SuperGuide article A super guide to understanding the bring-forward rule.

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 $1.6 million total super balance cap is not to be confused with the $1.6 million transfer balance cap. No, you’re not seeing double. Whoever made $1.6 million the cut-off mark for both had a dark sense of humour.

As mentioned above, your total super balance cap is the ceiling above which, you can no longer make additional non-concessional contributions. The transfer balance cap is the amount of super you can transfer into a tax-free pension account.

If your total super balance was greater than $1.6 million at the end of June 2019 and you want to retire and start a pension this financial year, you can only transfer $1.6 million into a tax-free pension account. The balance will have to stay in accumulation phase where it may be subject to a maximum tax rate of 15%.

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 add any more money into it.

That’s not the end of the story though. Colley says, 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 provided you remain under the $1.6 million 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. Couples can contribute up to $600,000 combined.

These downsizer contributions are designed for retirees who are 65 or older and don’t meet the work test, making them ineligible to take advantage of the $300,000 bring-forward rule.

Downsizer contributions are not subject to the $100,000 annual non-concessional cap or the $1.6 million total super balance limit.

For more on the downsizing rules, see the SuperGuide article Downsizer contributions: How do they work and what are the current rules?

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.