Q: I turn 60 in May 2017. Is the compulsory 4% drawdown from my super pension treated on a pro-rata basis for my tax return for the 2016/2017 year, or can I draw it down after May 2017 rendering my super income after 60, and then tax-free?
You ask a popular question relating to tax-free super for over-60s, and the timing of superannuation pension payments in the financial year when an individual turns 60. For the benefit of other readers, at the end of my response, I also explain the minimum pension payment rules that you refer to in your question.
How are super benefit payments taxed?
Aged 60 or over: When an individual accesses super benefits upon retirement, he or she can take a lump sum or a superannuation pension. If an individual is aged 60 or over when receiving a super benefit, regardless of whether it is a lump or pension, those benefits will be tax-free. (The one exception to this tax-free bonanza is where an individual is a long-term public servant and they receive ‘untaxed’ super benefits – some tax applies to ‘untaxed’ benefits’ received on or after the age of 60.) For more information on super taxes post-60, see SuperGuide article Tax-free super for over-60s, except for some (from 1 July 2017).
Under the age of 60: If an individual is under the age of 60, then tax is usually payable on super benefits. If the super benefit includes a ‘tax-free component’ then no tax is payable on this component of a benefit even when an individual is under the age of 60. I explain the tax rules for super benefits received before the age of 60 in the SuperGuide articles Retirement: 3 ways of taking super benefits before the age of 60 and Retiring before the age of 60: the tax deal from 1 July 2017.
Note: From 1 July 2017, the amount of super that can be transferred to pension phase will be capped at $1.6 million (indexed) (for more information, see SuperGuide article Burden for retirees: Monitoring $1.6 million transfer balance cap).
Waiting until you turn 60 before taking pension payments
In your question, you’re asking what happens in the year that someone turns 60, if they have already started a superannuation pension. Do they have to take payments evenly throughout the year, so some pension payments are made before the age of 60, and then taxable? Or, can they wait until they turn 60 before making the minimum pension payments, so all super benefit payments for that financial year are free of income tax.
According to the pension payment rules, provided the minimum pension payments are made during the financial year, it doesn’t matter whether the minimum is met in a single or multiple payments, or paid at the beginning, the middle or the end of the year. In short, in the year an individual turns 60, he or she can delay taking pension payments until they turn 60 in order to take advantage of the tax-free super rules.
If an individual chooses to take some pension payments before the age of 60, then those benefit payments are likely to be taxable. Note that the tax-free component of a super benefit is tax-free before or after the age of 60.
Note: If a super pension is commenced on or after 1 June of the financial year, then no minimum pension payment is required for that first year, according to Schedule 7, paragraph 4 of the Superannuation Industry Supervision (SIS) Regulations 1994.
Aged-based minimum pension payments
For the benefit of other readers I will now explain the context of your question. The compulsory 4% drawdown that you’re referring to is the minimum annual payment factor for an account-based pension for an individual aged under the age of 65 (that is, for individuals aged from 55 to 64). For example, Michael, aged 60 has $500,000 in his account-based pension account as at 1 July 2016. Under the rules, his minimum pension payment/s for the 2016/2017 financial year must be 4% of his account, or $20,000.
For more information about the minimum payment rules, including the payment percentage factors for other ages, see SuperGuide article SMSF pension: How do I calculate my minimum pension payment?