Super: What are your options when you retire?

Retire super

Even though its compulsory to invest money in superannuation, many people do not understand their options once they retire.

This blog provides a summary. However, of course, everyone’s situation is different. Some super funds have different rules and there may be exceptions to some rules, so it’s important you receive personalised advice from an independent financial advisor.

When can you access your super?

The rules that govern when you can access super are contained in the SIS Act and they are called the ‘conditions of release’. There are three ways you can access your super benefit:

  1. You have reached your preservation age, which is age 60 for most people (or sooner if you were born prior to 1 July 1964), you have ceased employment and have no intentions of becoming reemployed in the future;
  2. If you have reached your preservation age but are younger than 65 and still working, you are able to commence a Transition-to-Retirement Income Stream (TRIS) pension; or
  3. You are 65 years of age, regardless of employment status.

These minimum rules apply to all super funds. Super funds are permitted to impose tougher rules than outlined above, so it’s important to check with your super fund.

You have two super options when you retire

When you retire you generally have two options:

  1. Withdraw your full super balance as a lump sum; or
  2. Start an income stream pension.

If you are a member of a defined benefit fund, you may have additional options such as commencing an indexed lifetime pension.

If you opt to take your benefit as a lump sum, some of your benefit (i.e. the “taxable – untaxed element”) may be taxed at a rate of up to 17% and the “taxable – taxed element” will be tax-free.  

Given the tax advantages of leaving your money in super (outlined below), most people are much better off to opt to start an income stream pension.

Consequences of starting a super pension

You can start a pension by rolling over your accumulation account into a pension account. You can roll over up to $1.7 million into a pension account (this is a lifetime cap – called the transfer balance cap). Any account balance that exceeds $1.7 million must be retained in your accumulation account.

Pension super accounts attract a zero-tax rate. That means you do not pay any tax on any investment income or capital gains that your super balance generates.

If you commence a pension, you must withdraw a minimum pension amount, which is based on your age. For example, its 4% of your super balance at the beginning of the financial year if you are younger than 65, or 5% if you are aged between 65 and 74. There is no maximum i.e. you can withdraw as much as you like from super each year. Again, typically, the goal is to preserve your super balance as much as possible as it’s a zero-tax environment.

All income that you receive personally from an income stream pension is tax-free if you are 60 years or older i.e. it does not attract any personal income tax.

If you withdraw money (pension) from super but don’t spend it i.e. its more than you need, you may be able to put it back into super via making a non-concessional contribution. If you have less than $1.7 million of super in total, and are younger than 74, it is likely that your annual non-concessional contribution cap is $110,000 (if you are between 67 and 74, you may have to meet the ‘work test’). You will need to establish an accumulation super account to make these contributions. You can then roll over (combine) this accumulation account into your pension account if you are still under the $1.7 million lifetime transfer balance cap.

In summary, if you retire at age 60, you must draw at least 4% from super. This income is tax-free and your super’s investment earnings are also tax-free.

How are super pension payments funded?

If your super is invested with an industry super fund (or similar), then you don’t have to worry about the funding of pension payments, as the super fund will look after it. All you need to do is ensure you have selected the most appropriate investment option.

However, if you have a SMSF or wrap product, you will need to consider how you fund pension payments. This is particularly important if you have invested in residential or commercial property, as these assets are relatively illiquid and can cause some planning challenges.

It is possible that you will need to fund pension payments from a combination of investment income (dividends and interest) plus the gradual sell-down of investments. This is something your financial advisor will assist with.

How much super do you need to retire?

In retirement, most couples spend between $80,000 and $100,000 p.a. excluding big holidays.

You can use this calculator to find out what your super balance may be by the time you reach retirement age. Multiple that balance by 4%, it will tell you how much income you may receive from super[1]. If it’s less than your desired amount, then it’s a sign that you must invest more in and/or outside of super.

It is common (and preferrable) for my clients to fund living expenses in retirement from several sources including super pensions. Put differently, it’s uncommon for super pensions alone to fund all living expenses. That’s why it’s important to begin your investment journey as soon as practical at the same time as making super your super is wisely invested (here’s two relevant blogs about that here and here).

[1] If you start a super pension at 60 and draw the minimum percentage amount, it is very likely that your balance will last at least to age 100.