www.esuperfund.com.au

Preservation Age to 59 & NOT Retired


There are significant superannuation regulation changes that may affect your pension decisions:

  • The pension transfer balance cap (TBC) increases from $1.7 million to $1.9 million after 1 July 2023.
  • The 50% Covid-19 reduction in superannuation minimum drawdown requirements ceases to apply after 1 July 2023.
  • The lump sum low rate cap increases from $225,000 to $230,000 in the 2023 FY and to $235,000 in the 2024 FY.
  • ALL SMSFs are required to report most events that affect the member's TBC within 28 days after the end of the quarter in which the event occurs after 1 July 2023. A transition period applies for the unreported events that occurred before 30 September 2023, the SMSF has until 28 October 2023 to report them.

We are currently updating the contents on our website progressively to reflect the above changes. In the meantime, please be mindful of the changes when making pension decisions.

 
 
Preservation Age

Generally, you must reach preservation age before you can access your super. Use the following table to work out your preservation age.

Date of birth Preservation Age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 01 July 1964 60

 
 
Accessing your Super Benefit when aged between Preservation Age and 59 and NOT "Retired"

If you are aged between Preservation Age and 59 your Super Benefit is preserved until your retirement. You can only access your Super Benefit as a TRIS as detailed below when aged between Preservation Age and 59 and you are NOT "Retired".

 
 
Definition of "Retirement" when aged between Preservation Age and 59

For a Member aged between Preservation Age 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 Preservation Age 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 Preservation Age-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".

As soon as you retire from the workforce and you are satisfied that the definition of “Retirement” can be met, please complete the “Retirement” Application here.

 
 
Pension withdrawals when aged between Preservation Age and 59 and NOT "Retired"

When you are aged between Preservation Age and 59 and are NOT "Retired", you have the option of commencing a Pension Income Stream from your SMSF. A Pension means that periodically (e.g. each month or other period you nominate) cash is transferred from your SMSF Bank Account to your personal Bank Account to fund your living expenses. There are two types of Pensions you can start in an SMSF namely an "SABP" and a "TRIS". When you are aged between Preservation Age and 59 and are NOT "Retired" you can only commence a TRIS.

If you do decide to commence a TRIS from your SMSF and are aged between Preservation Age and 59 and are NOT "Retired", then you must take a Minimum Pension Income per year. For more information on the Minimum Pension amount, please click here. If you commence a TRIS from your SMSF and are aged between Preservation Age and 59 and NOT "Retired", there is a maximum annual pension drawdown of 10%. For more information on commencing a Pension, please click here.

 
 
Taxation of Pension Withdrawals when aged between Preservation Age and 59

Tax may be payable on Pension withdrawals by a Member aged between Preservation Age 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 Preservation Age 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 Step 1 divided by Step 3 
  • Step 5: Calculate the Taxable Component percentage equal to Step 2 divided by Step 3 
  • Step 6: Multiply the Pension Payment by the Tax Free percentage at Step 4. The result is Tax Free.
  • Step 7: Multiply the Pension Payment by the Taxable percentage at Step 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 Preservation Age and 59. 

Assume you withdraw the minimum pension of 4% per annum on your $500,000 Super Benefit (i.e. $20,000).  The Pension withdrawn of $20,000 will be 80% tax free (i.e. $16,000) and 20% taxable (i.e. $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 34.50% personal marginal tax rate, you would be assessable on the $4,000 taxable portion of the Pension withdrawn at 34.50%, resulting in $1,380 in tax. Given you also receive a 15% "Pension Rebate" on the taxable portion of the Pension withdrawn of $4,000 (i.e. 15% of $4,000 or $600); the tax liability is further reduced to only $780. This means you pay tax of $780 on a $20,000 Pension withdrawal in the above example.

 
 
Timing of Pension Withdrawals income is important when turning 60

No tax is payable on Pension Withdrawals after the age of 60, however some tax may be payable on Pension withdrawals made between Preservation Age 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 2021 and are 59 at that time. On 10 March 2022 you will be turning 60. Your Super Benefit is made up of a 100% Taxable Component. You have nominated that you wish to take a Pension of $40,000.

If the Pension amount of $40,000 is taken before 10 March 2022, 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 39% personal marginal tax rate, you would be assessable on the $40,000 Pension withdrawn at 39%, resulting in $15,600 in tax. Given that you also receive a 15% "Pension Rebate" on the taxable portion of the Pension withdrawn totalling $6,000 (i.e. 15% x $40,000), the tax liability is reduced to $9,600. This means you will pay tax of $9,600 on the $40,000 Pension withdrawal in the above example.

Conversely by deferring accessing the Pension withdrawal until after 10 March 2022, when you turn 60, then the Pension withdrawn will be tax free! 

 
 
Lump Sum withdrawals when aged between Preservation Age and 59 and NOT "Retired"

Lump Sum Withdrawals is an amount accessed from your SMSF that is not a Pension Payment.  You cannot make lump sum withdrawals from your SMSF when aged between Preservation Age and 59 and NOT "Retired".

 
 
Not required to access Super Benefit when aged between Preservation Age and 59 and NOT "Retired"

If you are aged between Preservation Age and 59 and NOT "Retired", you are not required to access your Super Benefit as a TRIS.  The choice is entirely yours.  In fact you can let your Super Benefit accumulates in the super environment indefinitely.

 
 
Contributions when aged between Preservation Age and 59 and NOT "Retired"

If you are aged between Preservation Age and 59 and NOT "Retired", you can still contribute to superannuation (no work test / work test exemption is required) subject to the contribution rules.