Superannuation is an essential part of retirement planning for most Australians. It is a tax-efficient way to save for your retirement, and this article will give you seven key things to consider when transitioning from the accumulation phase to the pension phase within superannuation.
Quick Clarifications
1. Eligibility
Pro-Tips: You might be eligible to move your super to a tax-free account even though you haven't finished working.
You must meet one of the two main conditions:
- You are 65. At this age everyone can access their super.
- You are at least 60 and can satisify the retirement definition. Understanding this definition is a great way to access your super and the tax benefits while not actually, or fully, retiring.
Once you make this transition, you have full, unrestricted access to your super. You can access this as a lump sum, income stream, or both.
Bonus tip: You can have both an accumulation AND a pension phase superannuation account.
2. Taxation
Pro-Tip: Tax free is hard to beat. But there are lots of rules around how much is tax free. You can't just dump a bunch of money in when you are 64. Planning matters.
An account-based pension's main benefit is its completely tax-free environment. There is no tax on any capital gains, no tax earnings or withdrawals.
However, this only applies to the $2.1 million that you are allowed to transfer into pension phase (this is called the transfer balance cap).
If your total super balance is more than this, you will have to leave funds in the accumulation phase, where it is currently taxed at 15%, then 30% for balances over $3 million.
However, this is still a low-tax environment, and these funds can remain here indefinitely until you pass away. You also have unrestricted access to these funds and can withdraw at any stage. It is essential to seek professional advice on how best to structure your affairs.
3. Investment Strategy
Pro-Tip: There is a middle path. You want to make sure you have enough. But, keep in mind that most people's spending drops off significantly after 80 - enjoy your retirement as well.
When transitioning to pension phase, it is an excellent time to review your investment strategy.
This move often coincides with retirement, and you should review your portfolio to ensure it generates sufficient income to support your retirement lifestyle.
People are living a lot longer, so don’t get caught in the trap of being too conservative in your investments and not having enough exposure to growth assets to make your money last.
As always, you should consider your investment goals, risk tolerance, time horizons and the impact of inflation on your investments.
4. Transition to Retirement Strategy
Pro-Tip: This is not for everyone! If you are short on cash it is useful. If you are not, this can leave you in a worse tax position.
If you are aged between 60 and 65, you can do a transition-to-retirement strategy rather than fully retiring. This allows you to take 4-10% of your savings annually while still working.
BUT! Keep in mind that if you have enough money, then you probably don't want to do this. This is taking money out of super (where it will be tax-free when you move into pension phase) and putting it into your own name, where it is taxed.
Most people want to do the opposite while 60-65. Some people can take advantage of some contribution strategies to save tax and boost super.
Or I have seen people who are buying property and can't get a loan use this strategy to help with any shortfall.
Either way, seek expert advice.
5. Pension Payment Amounts
Pro tip: Because pension phase is so tax advantageous, the government makes you take out a certain amount each year.
There are minimum drawdowns in pension phase, which you must adhere to.
You can see these here. The minimum amount you must withdraw each year will depend on your super account balance and is calculated on the 1st of July annually. Once you’ve met your minimum drawdown requirements you have full flexibility to decide how much income you want to receive from your pension and how often you want to receive payments.
You should consider your income requirements, pension entitlements, likely investment returns, sequencing risk, and other factors such as your life expectancy, when considering how much to withdraw.
Most people find that if they have $X outside super and $X in super, they are better off (from a tax perspective) spending the money outside of super first and then drawing down on super.
6. Centrelink and Social Security
Pro-Tip: Centrelink payments tend to favour homeowners.
If you are eligible for government benefits such as the Age Pension, your superannuation balance will affect your eligibility and the amount you receive. There are many legal ways to increase your pension entitlements, so you should speak with a qualified financial adviser to discuss ways to maximise these. It is best to get good quality advice and plan these things well in advance, as you can greatly enhance your entitlements with proper foresight.
7. Estate Planning
Pro-Tip: When you die, you can transfer super to your partner tax-free. BUT, not to adult children. They can pay up to 17%. There are strategies to reduce this amount.
An often-overlooked but essential consideration when transitioning to the pension phase is estate planning. If there are funds left over at the end of your life, have you considered who they will go to?
When you start a pension, you will need to make new death benefit nominations. It is important to review and update your beneficiary nominations every 3 years if they are not non-lapsing binding nominations or as your circumstances change.
Also, have you considered a re-contribution strategy? This strategy allows you to wash out the tax on any death benefits paid to non-tax dependants (eg. adult children). This can reduce the tax paid to these beneficiaries from 15% plus the 2% medicare levy to 0%. This strategy is now available to many more people since the work test has been abolished for after-tax contributions for people aged 67 to 74. You can read about this here and see a worked example. An expert estate planner can be worth their weight in gold and give you peace of mind your affairs are in order when the inevitable happens.
Summing it up
Transitioning from the accumulation phase to the pension phase within superannuation requires careful consideration of many factors. This list is not exhaustive and these are just some high-level things to consider when making this move.
Seeking professional advice from a qualified financial adviser or accountant can help you make informed decisions that are best suited to your individual circumstances. Planning this move many years in advance while working with a professional will reap the best results. You can speak with Nucleus if you want to discuss any of these strategies in more detail.
