Accessing your Super Benefit when aged between 55 and 59 and "Retired"

If you are aged between 55 and 59 your Super Benefit is preserved until your "Retirement".  There are absolutely no restrictions to accessing your Super Benefit when aged between 55 and 59 after you are "Retired".  In this case your Super Benefit can be accessed as either a Pension or Lump Sum Withdrawal.

Definition of "Retirement" when aged between 55 and 59

For a Member aged between 55 and 59 "retirement" means your employment ceases and you never intend to work again either on a full-time or part-time basis (defined as more than 10 hours per week).  This declaration must be made to your SMSF and is made at the time you cease work.  It is noted that whilst a Member aged between 55 and 59 never intends to work again, they may ultimately do so. This will not alter the Member's status as being retired enabling them to have access to their Super Benefit notwithstanding they have returned to work.  That is as long as the Member who is aged 55-59 genuinely believes that they will never work more than 10 hours a week in the future (believing that you will work less than 10 hours a week is acceptable) and signs a declaration to that effect, that Member will be considered "Retired".  It is important to note that reducing your hours with the same Employer to less than 10 hours per week rather than ceasing employment is not considered to be "Retired".

Pension withdrawals when aged between 55 and 59 and "Retired"

When you are aged between 55 and 59 and are "Retired" you have the option of commencing a Pension Income Stream from your SMSF.  A Pension simply means that periodically (eg each month or other period you nominate) cash is transferred from your SMSF Bank Account to your personal Bank Account SMSF to fund your living expenses.  There are two types of Pensions you can start in a SMSF namely a Simple Account Based Pension and a "Transition to Retirement Pension".  When you are aged between 55 and 59 and are "Retired" you can only commence a Simple Account Based Pension.

If you do decide to commence a Simple Account Based Pension from your SMSF and are aged between 55 and 59 and are "Retired", then you must take a Minimum Pension Income per year.  Further details about the Minimum Pension amount can be found in the Pension Section of our website here.  There is no Maximum Pension Amount if you are aged between 55 and 59 and are "Retired" and you are free to access all your Super Benefit as desired.  Further details about commencing a Pension can be found here.

Taxation of Pension Withdrawals when aged between 55 and 59

Tax may be payable on Pension withdrawals by a Member aged between 55 and 59.  By way of background it is important to understand that your Super Benefit is made up of two components, namely a Tax Free Component and a Taxable Component.  The Tax Free Component typically comes from after tax personal Non Concessional Contributions made by you over time.   The Taxable Component typically comes from Concessional Contributions made by you over time which include Employer Contributions and Salary Sacrifice Contributions. 

Any Pension withdrawals must be paid in the same proportion as the Tax Free and Taxable Components of a Member's Super Benefit in the SMSF.  This requirement is known as the "Proportioning Rule".  Under the "Proportioning Rule" the process to calculate the tax on Pension Withdrawals paid to a Member who is aged between 55 and 59 is as follows:

Step 1: Determine the Tax Free Component of your Super Benefit
Step 2: Determine the Taxable Component of your Super Benefit
Step 3: Total of the Taxable and Tax Free Components
Step 4: Calculate the Tax Free Component percentage equal to Note 1 divided by Note 3
Step 5: Calculate the Taxable Component percentage equal to Note 2 divided by Note 3
Step 6:  Multiply the Pension Payment by the Tax Free percentage at Note 4.  The result is Tax Free.
Step 7:  Multiply the Pension Payment by the Taxable percentage at Note 5.  The result is taxed at the Members tax rate less a 15% Pension Rebate.

Example:

As an example assume you have a Super Benefit of $500,000 made up as follows:

	$
Tax Free Component:	$400,000
Taxable Component:	$100,000
Total Super Benefit:	$500,000

In this example your "Tax Free" percentage is 80% ($400,000 / $500,000) and your "Taxable" percentage is 20% ($100,000 / $500,000).  Under the "Proportioning Rule" this means that 80% of your Pension withdrawals will be tax free and 20% will be taxable where the Pension withdrawals are made between the age of 55 and 59. 

Assume you withdraw the minimum pension of 4% per annum on your $500,000 Super Benefit (ie $20,000).  The Pension withdrawn of $20,000 will be 80% tax free (ie $16,000) and 20% taxable (ie $4,000).  In addition you will be allowed a 15% "Pension Rebate" on the taxable portion of the Pension withdrawn, further reducing your tax liability.

 In the above example assuming you are on the 31.50% personal marginal tax rate, you would be assessable on the $4,000 taxable portion of the Pension withdrawn at 31.50%, resulting in $1,260 in tax.  Given you also receive a 15% "Pension Rebate" on the taxable portion of the Pension withdrawn of $4,000 (ie 15% of $4,000 or $600), the tax liability is further reduced to only $660.  This means you pay tax of $660 on a $20,000 Pension withdrawal in the above example.

Timing of Pension Withdrawals income is important when turning 60

As detailed above no tax is payable on Pension Withdrawals after the age of 60, however some tax may be payable on Pension withdrawals made between age 55 and 59.  This means that where you are turning 60 in a particular financial year it may be financially advantageous to defer Pension withdrawals until you are over 60.

Example:

Assume you have commenced a Pension for $1,000,000 on 1 July 2011 and are 59 at the time.  On 10 March 2012 you will be turning 60.  Your Super Benefit is made up of a 100% Taxable Component.  You have nominated that you wish to take the Minimum Pension of 4% of your Super Benefit (ie $40,000).

If the Minimum Pension amount of $40,000 is taken before 10 March 2012, that is when you are aged 59, then the Pension will be taxed at your marginal tax rate less a 15% "Pension Rebate".  Assuming you are on the 46.50% personal marginal tax rate, you would be assessable on the $40,000 Pension withdrawn at 46.50%, resulting in $18,600 in tax.  Given that you also receive a 15% "Pension Rebate" on the taxable portion of the Pension withdrawn totaling $6,000 (ie 15% x $40,000), the tax liability is reduced to $12,600.  This means you will pay tax of $12,600 on the $40,000 Pension withdrawal in the above example.

Conversely by simply deferring accessing the Pension withdrawal until after 10 March 2012, when you turn 60, then the Pension withdrawn will be tax free!  The timing of the Pension Withdrawals in the example results in a tax saving of $12,600!   

Tax Savings when you commence a Pension

Given that minimal tax may be payable on Pension withdrawals when aged between 55 and 59, it may still be advisable to commence a Pension even when aged between 55 and 59, given you pay no tax on the earnings and realised capital gains on your Super Benefit within the SMSF.  However you will need to assess your own individual circumstances to determine if a Pension should be commenced.  To see the potential Tax Savings associated with commencing a Pension view our Case Study here.  To demonstrate the Tax Savings of commencing a Pension using your own personal circumstances click here to participate in our Interactive Pension Analysis and see how much tax you can save.

Lump Sum withdrawals when aged between 55 and 59 and "Retired"

The alternative way to access your Super Benefit when you are aged between age 55 and 59 and "Retired" is as a Lump Sum Withdrawal.  A Lump Sum Withdrawal is simply an amount accessed from your SMSF that is not a Pension Payment.  You can make lump sum withdrawals whenever you like from your SMSF once you are aged between age 55 and 59 and "Retired". 

Taxation of Lump Sum Withdrawals between age 55 and 59

Your Super Benefit is made up of two components, namely a Tax Free Component and a Taxable Component.  The Tax Free Component typically comes from after tax personal Non Concessional Contributions made by you over time.   The Taxable Component typically comes from Concessional Contributions made by you over time which include Employer Contributions and Salary Sacrifice Contributions.  Any Lump Sum Withdrawals must be paid in the same proportion as the Tax Free and Taxable Components of the Member's interest in the SMSF.  This requirement is known as the "Proportioning Rule". 

Under the "Proportioning Rule" and where the Member is aged between age 55 and 59, the "Tax Free" Component of the Lump Sum withdrawal is tax free.  The "Taxable" Component of the Lump Sum withdrawal is taxed as follows:

The First $165,000 of your Taxable Component is tax free.
The next $165,000 of your Taxable Component is taxed at 16.50%

Calculating the Tax on Lump Sum Withdrawals between Age 55 and 59

The process to calculate the tax on Lump Sum Withdrawals paid to a Member who is aged between 55 and 59 is as follows:

Step 1: Determine the Tax Free Component of your Super Benefit.
Step 2: Determine the Taxable Component of your Super Benefit.
Step 3: Total of the Taxable and Tax Free Components.
Step 4: Calculate the Tax Free Component percentage equal to Note 1 divided by Note 3
Step 5: Calculate the Taxable Component percentage equal to Note 2 divided by Note 3
Step 6:  Multiply the Pension Payment by the Tax Free percentage at Note 4.  The result is Tax Free.
Step 7:  Multiply the Lump Sum Withdrawal by the Taxable percentage at Note 5.  The result is taxed at:
The First $165,000 is tax free.
The next $165,000 is taxed at 16.50%

Example:

As an example assume you have a Super Benefit of $500,000 made up as follows:

	$
Tax Free Component:	$400,000
Taxable Component:	$100,000
Total Super Benefit:	$500,000

In this example your "Tax Free" percentage is 80% ($400,000 / $500,000) and your "Taxable" percentage is 20% ($100,000 / $500,000).  Under the "Proportioning Rule" this means that 80% of your Lump Sum withdrawals will be tax free and 20% will be taxable where the Lump Sum withdrawals are made between the age of 55 and 59.

Assume you decide to access $100,000 as a Lump Sum withdrawal and are eligible to do so.  In this case an amount of 80% will be tax free and the balance will be taxable, namely 20% of the $100,000 or $20,000.  The $20,000 assessable amount is then taxed as follows:

The First $165,000 of your Taxable Component is tax free.
The next $165,000 of your Taxable Component is taxed at 16.50%

In the above example as the taxable portion of the Lump Sum of $20,000 is less than $165,000, it is tax free.  If you are contemplating large lump sum withdrawals before age 60 and the assessable portion of the Lump Sum withdrawal is above $165,000, then it may be prudent to defer accessing larger lump sum withdrawals until age 60 when the lump sum withdrawals are tax free. 

Choosing between Pension and Lump Sum Withdrawals

When you are aged over 60 all withdrawals, whether they are Pension or Lump Sum withdrawals are tax free.  However when aged between 55 and 59 Pension and Lump Sum withdrawals may be subject to tax and the tax will differ depending on the which withdrawal type you make. 

Given the difference in the taxation treatment of accessing monies from your SMSF as a Pension or Lump Sum when you are aged between 55 and 59, it is sometimes preferable to treat withdrawals as a combination of both a Pension and Lump Sum, rather than solely as a Pension once you commence a Simple Account Based Pension between the age of 55 and 59.  It is important to understand that if you have commenced a Simple Account Based Pension it means you are "Retired" and this is a precondition to being able to take Lump Sum withdrawals.  You cannot make Lump Sum withdrawals when you commence a TRAP and Pension payments are capped at 10% of your Super Benefit..

Remember your Super Benefit is made up of two components, namely a Tax Free Component and a Taxable Component.  The Tax Free Component typically comes from after tax personal Non Concessional Contributions made by you over time.   The Taxable Component typically comes from Concessional Contributions made by you over time which include Employer Contributions and Salary Sacrifice Contributions. 

Any withdrawals must be paid in the same proportion as the Tax Free and Taxable Components of the Member's interest in the SMSF.  This requirement is known as the "Proportioning Rule".  Under the "Proportioning Rule" and where the Member is aged between age 55 and 59, the "Tax Free" Component of the withdrawal is tax free.  The "Taxable" Component of the withdrawal is taxed differently depending on whether it is a Lump Sum or a Pension.  That is the "Taxable" Component of the Pension withdrawal is taxed at the Members marginal tax rate less a 15% "Pension Rebate".  Alternatively the first $165,000 of a Lump Sum withdrawal is tax free and the balance is taxed at 16.50%.

Example

Barney is 58 and has a Super Benefit of $1,000,000 made up as follows:

	$
Taxable Component:	$800,000
Tax Free Component:	$200,000
Total Super Benefit:	$1,000,000

In the above example this means that 80% ($800,000 / $1,000,000) of Barney's Super Benefit is taxable and $20% ($200,000 / $1,000,000) is tax free.  Barney commences a Simple Account Based Pension on 1 July and must access 4% of his Super Benefit as a Pension (ie $40,000).  

Assume Barney decides to access $150,000 from his SMSF.  If the entire amount was treated as a Pension withdrawal, Barney would pay a whopping $16,150 in tax.  That is he would be taxed on 80% of the Pension Income of $150,000 (ie $120,000).  Tax on $120,000 is $34,150.  After applying a 15% "Pension Rebate" of $18,000 ($120,000 x 15%) the net tax payable is $16,150.  If Barney alternatively had chosen to take the Minimum Pension of $40,000 only and treat the additional withdrawal of $110,000 as a Lump Sum Withdrawal, the tax result would be completely different.

That is on the $40,000 Pension withdrawal, Barney would be taxed on 80% of the Pension Income (ie $32,000).  Tax on $32,000 is $2,960.  After applying a 15% "Pension Rebate" of $4,800 ($32,000 x 15%) the net tax payable is $0.  It is noted that if the Pension Rebate creates a refund the refund is lost.

On the remaining $110,000 Lump Sum withdrawal, Barney would be taxed on 80% of the Lump Sum Withdrawal (ie $88,000).  Given that Barney can access the first $165,000 in Lump Sum withdrawals tax free, the entire $110,000 would be tax free.

This means that Barney's withdrawal of $150,000 is now completely tax free (ie a Pension Withdrawal of $40,000 that is tax free plus a Lump Sum Withdrawal of $110,000 that is tax free).  This simple strategy has saved Barney $16,150. 

Now the good news:

Trying to determine the optimal way to treat withdrawals can be difficult.  This is why ESUPERFUND does it for you as part of the annual compliance process.  Even better we will prepare all supporting paperwork absolutely FREE of charge.  Most accountants would charge $1,000 or more for the same service.

Not required to access Super Benefit when aged between 55 and 59 and "Retired"

If you are aged between 55 and 59 and "Retired" you are not required to access your Super Benefit as either a Pension or a Lump Sum Withdrawal.  The choice is entirely yours.  In fact you can let your Super Benefit accumulate in the super environment indefinitely.  It is noted it is may be tax advantageous to commence accessing your Super Benefit when aged between 55 and 59 as a Simple Account Based Pension when "Retired".  This is because when you commence a Simple Account Based Pension you never pay tax on the income and capital gains on your SMSF Investments. However any monies you access as a Pension may be taxable as detailed above.

Contributions when aged between 55 and 59 and "Retired"

If you are aged between 55 and 59 and "Retired" you can still contribute to superannuation (no work test is required). These contributions are not preserved and can be immediately withdrawn as a lump sum or pension at any time following the contribution.  It is noted that this is still the case even if you have commenced a Simple Account Based Pension.

Interactive Analysis

To demonstrate the benefits of commencing a Pension using your own personal circumstances click here to participate in our Interactive "Pension Analysis" and see how much tax you can save.

To determine if it is possible to make Pension or Lump Sum Withdrawals from your SMSF and the taxation implications thereon using your own personal circumstances click here to participate in our Interactive "Super Access and Tax Analysis".