A superannuation income stream can provide you with regular income to assist in covering your retirement expenditure needs, or supplement your income as you transition to retirement.
It’s important to understand when is a suitable time to start a superannuation income stream and which type of income stream would be most appropriate.
What is a Superannuation Income Stream
A superannuation income stream is an income stream commenced with your superannuation accumulation balance once you are eligible to access your superannuation. Generally, you will commence a superannuation income stream at retirement; however, this is not mandatory. You may even decide to commence an income stream as you transition into retirement.
The two most common types of superannuation income streams are transition to retirement pensions and account-based pensions. Let’s take a look at each one in more detail.
Transition to Retirement Pension
You are able to start a transition to retirement pension with some or all of your super balance, regardless of whether you are still working or not.
If you do decide to start a transition to retirement (TTR) pension, you must receive an income of between 4% and 10% of your TTR pension balance each financial year, recalculated on 1 July of each year.
An account-based pension is a superannuation income stream that you are permitted to start once you have met a full superannuation condition of release. The most common conditions of release are meeting the superannuation definition of retirement or attaining age 65.
If you decide to start an account-based pension, you must receive an income of at least 4% of your account-based pension balance each financial year, recalculated on 1 July of each year. This is the minimum withdrawal amount.
Watch this video to understand your options at retirement:
Is a Superannuation Income Stream Taxable?
A superannuation income stream may or may not be taxable depending on your age. Generally, pension payments from a super income stream are received tax-free if aged 60 or over; whereas tax may be payable if you are under age 60.
Superannuation Income Stream Over 60
All pension payments received from either an account-based pension or TTR pension are received completely tax free from age 60 and over.
Some tax may be payable if your balance includes an uncommon Untaxed component.
Superannuation Income Stream Under 60
Some or all of your pension payments may be assessed for tax if you are under age 60.
All pension payments must be made proportionately from each tax component that makes up your pension balance.
The tax-free component portion of the pension payment will always be received tax-free.
The taxable component portion of the pension payment will be taxed at your marginal tax rate, along with all of your other sources of taxable income, but you will receive a 15% tax rebate for this portion. If you are under your preservation age, no tax rebate will be received.
The untaxed component portion of the pension payment will be taxed at your marginal tax rate.
Read More: Tax On Super Withdrawals
Tax on Superannuation Income Stream Earnings
The tax on superannuation income stream earnings will depend on whether you have a transition to retirement pension or an account based pension.
When you start a superannuation income stream, your balance will be invested, just as it is with your superannuation accumulation account. You are able to choose how it is invested, by choosing from your super provider’s investment options.
The tax rate on TTR pension earnings is the same as the tax applied to earnings within a superannuation accumulation account. Specifically, all income earnings generated from investments are taxed at 15% and capital gains tax in super is 15%, reducing to 10% if the investment sold was owned for longer than 12 months.
The tax rate on account-based pension earnings is 0% on all income generated from investments and all realised capital gains. This is one of the advantages account-based pensions have compared to TTR pensions and accumulation accounts.
Read More: Tax on Super Earnings
What is the Transfer Balance Cap?
The transfer balance cap is the maximum amount of your super accumulation balance that can be converted into a retirement income stream but does not apply to TTR pensions. The current transfer balance cap amount is $1.9 million.
The transfer balance cap is indexed in line with CPI and increases in $100,000 increments. The portion of any increase that you are eligible to use is equal to the percentage portion of your unused transfer balance cap at the time of the increase.
Does a Superannuation Income Stream Affect Pension?
Yes, a superannuation income stream does affect Age Pension payments. Once you commence a superannuation income stream, regardless of whether you are of Age Pension age, or not; it will become assessed for Centrelink or DVA purposes for both you and your spouse.
This is true for both account-based pensions and TTR pensions.
Therefore, you should be mindful of commencing a superannuation income stream while under Age Pension age if you or your partner are currently in receipt of social security payments because this can affect pension entitlements.
Once you attain Age Pension age, all of your superannuation is assessed for Centrelink purposes, regardless of whether it is in an accumulation account or has been used to commence a superannuation income stream.
Is it Better to Take Superannuation as a Lump Sum or Income Stream?
Determining whether it is better to take superannuation as a lump sum or income stream will depend on your age, the amount you wish to withdraw, your tax components, your employment status and your overall situation.
If you have met a full superannuation condition of release and have unrestricted access to your super, you might be wondering whether it’s better to take superannuation as a lump sum or income stream.
You could even be referring to a defined benefit account, which requires you to make a choice of a lump sum, income stream, or combination of the two, upon cessation of work. If this is you, you should most certainly seek professional advice. Make a phone appointment with us here to discuss your situation.
If you have an ordinary superannuation accumulation account and are over age 60, taking super as an income stream can provide you with a regular tax-free income into your personal bank account. Additionally, all earnings within the account will be tax-free. There will be a minimum required pension amount that you must draw each year, but the upper-income amount that you can draw is only limited by your account balance.
If you are under age 60, tax-free investment earnings within the account will also exist and there will be no upper limit on the amount of income you can receive; however, you may pay tax on the actual pension payments received, based on the taxable portion of each payment received. However, if you decide to make a lump sum withdrawal while under 60, you can utilise the low rate cap amount to reduce or eliminate super lump sum tax. Just another trick of the trade!
The amount of super you can have and still get the pension will depend on all of your other income and assets, your marital status, your home-ownership status and whether you are assessed under the Centrelink Income Test or Assets Test.
Once you attain Age Pension age, your superannuation is counted as an asset for Centrelink pension purposes and assessed as income, regardless of whether your balance is within an accumulation account or income stream.
Read More Here: How Much Can You Have and Still Get the Pension?
Should I Start an Income Stream with My Super?
If there was ever a time that you were going to get professional financial advice, it would be when you are moving into retirement. There are so many decisions that need to be made, plenty of ways to minimise tax and a lot of rules to navigate. There is no one answer for everyone.
Our financial planning firm, Toro Wealth, specialises solely in helping 50 to 70 year-olds optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.
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