Time to start thinking about a superannuation pension?
You’re finishing up your career, or at least thinking about it, and you want to wrap your head around how a superannuation pension works.
Well, settle in and let me tell you the yarn about superannuation pensions in Australia.
What Are Superannuation Pensions?
While you are working, contributions are made into your superannuation accumulation account. Your superannuation account balance is invested, with the intention of investment earnings and super contributions increasing your balance to help fund your retirement.
A superannuation pension is an income stream that you start with some or all of your superannuation accumulation balance, once you become eligible.
There are two main types of superannuation pension:
- Transition to Retirement (TTR) Account-Based Pension
- Ordinary Account-Based Pension
Even once you commence a pension, your balance remains invested in your preferred investment option. But rather than the account receiving contributions, mandatory withdrawals referred to as pension payments must be made from the pension account.
The process and structure of superannuation pensions is the same for self managed super funds (SMSF) as it is for standard superannuation funds. The only main difference is that SMSF assets are usually pooled together (not separated by accounts) and a ledger behind the scenes keeps track of how much is in a superannuation pension and who it belongs to.
Difference Between a TTR Pension and Ordinary Account-Based Pension?
A TTR Pension is a pension that you are able to start once you have reached your superannuation preservation age – even if you are still working. You might decide to start a TTR pension to:
- Supplement reduced working hours as you get closer to retirement;
- Use the additional income for other purposes, such as paying off debt faster;
- Begin a recontribution strategy to increase the tax-free component; and/or
- To reduce tax by implementing a transition to retirement strategy.
A TTR Pension allows you to receive an income between a minimum and maximum threshold and all investment earnings are taxed at 15%, with capital gains tax (CGT) reducing to 10% if the investment sold was owned for longer than 12-months.
An ordinary account based pension is the same as a TTR pension, with the following differences:
- There is no maximum income threshold;
- All investment earnings are received completely tax-free; and
- You need to meet a full superannuation condition of release to begin one (e.g. satisfy the superannuation definition of retirement or attain age 65).
Basically, an ordinary account based pension is a more flexible, tax-effective version of a TTR pension and preferable over a TTR pension for these reasons.
Superannuation Pension Minimum Withdrawal
All superannuation pensions have a minimum withdrawal requirement. It is a minimum amount that must be withdrawn each financial year.
The minimum amount is determined by your age and account balance. Each age group has a pension factor, as shown in the table below:
|Age||Standard Minimum Percentage Factor||Reduced Minimum Percentage Factor (2020 - 2023 FY inclusive)|
|Below Age 65||4%||2%|
|65 - 74||5%||2.50%|
|75 - 79||6%||3%|
|80 - 84||7%||3.50%|
|85 - 89||9%||4.50%|
|90 - 94||11%||5.50%|
|Age 95 and above||14%||7%|
To work out your minimum pension requirement, you multiply your 1 July account balance by the pension factor relevant to your age group on that day.
The pension factor is applied on 1 July of each year to your account balance to determine your minimum annual drawdown requirement in dollar terms, rounded to the nearest $10. Each year the minimum pension withdrawal amount is recalculated.
If you commence a pension part way through a financial year, the minimum withdrawal amount is pro-rata based on the number of days remaining in the financial year as a proportion of the total number of days in the year.
Pension payments can usually be received fortnightly, monthly, quarterly, biannually or as a one-off annual payment.
Superannuation Pension Maximum Withdrawal
A TTR income stream has a maximum allowable withdrawal value equal to 10% per financial year. You are unable to receive an income above 10% from a TTR Pension in any given financial year. This maximum 10% amount is not pro-rata if you commence a TTR Pension part way through a financial year.
In relation to an ordinary account based pension, there is no maximum pension withdrawal amount. You are free to draw as much as you like from an ordinary account based pension, provided you satisfy the minimum annual income requirement.
When Can I Start a Superannuation Pension?
The age in which you commence a superannuation pension is based on the type of pension you wish to commence and your employment status at the time.
Once you have reached your superannuation preservation age, you are free to commence a TTR Pension, regardless of your employment status.
If you have reached your preservation age and are retired, with no intention of returning to full-time or part-time work ever again, then you are permitted to start an ordinary account based pension.
If you had an employment arrangement come to an end on or after attaining age 60, then you are free to commence an ordinary account based pension – even if you commence new work.
If you have reached age 65, you are permitted to commence an ordinary account based pension, even if you are still working.
Superannuation Pension Tax
The tax of superannuation pension income is determined by your age and the tax components of your super balance.
If you are above your preservation age, but under age 60, the tax-free portion of your pension income is received tax-free and the taxable portion is taxed at your marginal tax rate, but you receive a tax offset equal to 15% of the taxable portion.
If you are aged 60 or above, your pension income will generally be received tax-free.
If your superannuation pension includes an untaxed element, tax may be payable at any age on this portion. However, this is uncommon.
Related article: Do Pensioners Pay Tax In Australia?
What is the Difference Between Pension and Superannuation?
It can be difficult to understand different terminology, especially when superannuation funds use various names for their types of accounts.
But basically, superannuation is the whole retirement system encompassing all types of accounts you might hold with a superannuation fund. Then, under the umbrella of superannuation, you have accumulation accounts, TTR pension accounts and account based pensions.
A super accumulation account is usually the account you hold while you are working and contributions are being made to it. Then, when you retire (or are nearing retirement), you transfer all or some of your super accumulation account into a superannuation pension, such as a TTR pension or an account based pension.
Watch this video to understand your options at retirement:
Do You Get a Pension if You Have Superannuation?
Yes, you can. Having superannuation does not prevent you from receiving Age Pension payments.
Again, terminology can be confusing here, because there are two types of pensions that we call pensions, but are completely different types of pensions.
Firstly, we have the Age Pension, which is a social security payment made by Centrelink to eligible retirees once you reach Age Pension age. The amount of Age Pension you receive, if any, is means-tested, based on your overall level of assets and income.
Secondly, as discussed throughout this article, we have a superannuation pension, which is an income stream paid from your superannuation account.
Is Super Pension Counted as Income?
For tax purposes, super pension income is generally not counted as income if you are aged 60 or over. However, if you are under age 60, it will be counted as income for tax purposes.
For social security assessment purposes, including Age Pension payments, or health care card purposes, a superannuation pension is generally ‘deemed’. Deeming means that the actual pension payments you receive from the super pension are not counted as income, but instead, your super pension balance (on any given day) is added together with all of your other deemed financial assets (shares, bank accounts, etc.) and deemed to earn a particular rate of income. This is the amount of income used to determine the types and amounts of social security benefits you are entitled to.
However, if you have a grandfathered super pension, commenced prior to 1 January 2015 (plus meeting other criteria), the actual income, minus the deductible amount, will be assessed. In this instance, the super pension will not be deemed.
Maximising the Centrelink Age Pension through the correct structure of your superannuation is not overly difficult for a professional financial planner, but can be an absolute minefield for an everyday Australian. And, getting it wrong can be costly.
Superannuation accumulation accounts and superannuation pensions are assessed for Centrelink Age Pension purposes under the Assets Test and the Income Test in some cases but not in others. Structuring your superannuation in the right manner can result in a significant increase in Age Pension payments and other entitlements.
How To Start a Superannuation Pension
Starting a superannuation pension can be as simple as contacting your superannuation provider or SMSF administrator and going through the process.
While starting a superannuation pension is not difficult, ensuring that you are starting a superannuation pension for the right reasons and in the correct manner, as well as understanding all of the risks and implications of doing so, is where professional advice can help. When it comes to superannuation, once a mistake is made there is no turning back, and a mistake can easily cost tens of thousands of dollars. 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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