If I want to start a pension, am I obliged to do so with the percentage minimum of the whole of my super (far too much for my daily living requirements) or may I instead leave some in the accumulation phase and simply start a pension from, say, half the balance?
It has always been possible to start a pension with only a portion of your retirement benefits provided you have reached your preservation age (age 55 for those born before July 1960). However previously you were compelled to cash out your remaining superannuation or start an income stream with it once you reached age 65.
Recent changes to superannuation now allow you to keep your money inside superannuation without commencing a pension indefinitely. Whether this best suits your needs should be examined very carefully.
Most retirees start a pension upon retirement because of two reasons. The tax on earnings is reduced from 15% to zero, and income streams have a very low rate of taxation because of tax-free portions and rebates. Since July this year those over age 60 can receive superannuation income streams totally free of tax.
For those aged from 55 to 64 minimum pensions have also been reduced to only 4% of their balance at the beginning of each year, and 5% for those aged 65 to 74. It is possible for a 60 year old with $1 million in super to commence a pension of $40,000 totally tax-free – earnings as well as income stream.
It would also be possible for that very same person if they were still working, to commence their income stream tax-free and salary package a sizeable portion of their earned income back to superannuation, further boosting their retirement assets. This is called a “Transition to Retirement” pension. If the million dollars were left as superannuation, the earnings tax on that amount could be as high as $6,000 per annum (4% earnings taxed at 15%). This tax could be saved and further savings would be made on the amount sacrificed back to superannuation.
Further considerations may be recent Centrelink changes as of September this year. It is now possible for superannuants with sizeable assets to achieve some benefits under the new assets rules, and commencing an income stream could provide an advantage for those affected more by the income test than the asset test.
The point I am making is that establishing and structuring income streams depends very much on your own specific needs and situation. Sometimes detailed calculations need to be made to discover what is best in your case. And of course the recent changes mean you can always revert your income stream back to superannuation if it no longer suits you. Unless you are a superannuation specialist I always recommend you get sound and competent advice before embarking on a course of action.
Disclaimer: This article is general in nature and is not intended as investment advice. Readers should always seek further advice before making any financial decisions.
Paul Jackson is a Brisbane-based Financial Planner with MacDonnells Financial Services, which is licensed under FYG Planners.