Timing counts if you plan to retire this year and start a super pension

That’s because pension withdrawals are tax free after age 60. If you start your pension between your preservation age, currently 58, 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.

Be aware of the work test when timing extra contributions

If you are approaching age 67 and hoping to make some last-minute 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.

Under the work test, if you are 67 (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.

If you don’t meet the current requirements of the work test, 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 after-tax contributions up to the $110,000 non-concessional cap, and concessional contributions up to the $27,500 cap, in the first financial year after you retire. This is designed to give retirees more time to arrange their finances.

You may also be able to use the bring-forward contribution rules to make a larger contribution during the 12-month exemption period. This allows you to bring forward up to two years’ non-concessional contributions to the current financial year, up to a total amount of $330,000 (3 x $110,000).

Mind your total super balance before making extra contributions

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

Once your super balance hits $1.7 million you can’t make any further non-concessional contributions. Putting the increase in the TSB together with higher contribution caps from 1 July 2021, if your TSB was below $1.7 million on 30 June 2021, you can make non-concessional contributions of up to $110,000 in the 2021-22 financial year. Previously, you would not have been able to contribute if your TSB was above $1.6 million.

This also has implications for the bring-forward rule, which allows you to make three years’ worth of non-concessional contributions, or up to $330,000 in one financial year. However, if you triggered a bring-forward arrangement prior to 1 July 2021, you will not be eligible to take full advantage of the higher caps. Calculating your personal cap amount is complex, so it’s worth seeking professional advice.

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 $1.7 million total super balance (TSB) cap is not to be confused with the $1.7 million transfer balance cap (TBC) that also increased from $1.6 million on 1 July 2021. No, you’re not seeing double. Whoever made the cut-off mark the same for both had a dark sense of humour.

As mentioned above, your TSB 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 $1.7 million at the end of June 2021 and you want to retire and start a pension before 1 July 2022, you can only transfer $1.7 million into a tax-free pension account. Any amounts above $1.7 million 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 any more money into it.

That’s not the end of the story though. Graeme Colley, executive manager of SMSF technical and private wealth for SuperConcepts, 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 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. 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 $330,000 bring-forward rule.

Downsizer contributions are not subject to the $110,000 annual general non-concessional cap or the $1.7 million total super balance limit.

The bottom line

As you can see, the rules around retirement and starting a super pension are complex and often confusing. Even more so in the transitional period surrounding the increase on 1 July 2021 in the transfer balance cap, total super balance and contribution caps.

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