Some options and rules on accessing retirements funds

For those who are nearing retirement and eyeing off their superannuation war chest, they must be thinking what needs to be done when the lock comes off. Lump sum, pension or a bit of both? The importance of the type of super benefit to draw may depend on ‘timing’. The timing will determine how much is required for retirement, how long will the balance last, what happens if investment markets drop and so on. This article looks at issues in drawing lump sums or drawing pensions from super.

Types of pensions

A member of an SMSF can commence an account-based pension or a transition to retirement income stream (TRIS). An account-based pension can commence once a member has reached their preservation age (currently age 58) and ‘retired’ or after they are 65 years of age or older without restriction. For members who are not retired but have reached their preservation age, they may wish to start a TRIS. The most important thing to understand is when is it possible to draw benefits from super.

A TRIS can be very handy option as it can provide cash flow when a person has reached preservation age and the individual may still continue to work full-time. It is possible for a person to commence a TRIS and at the same time may qualify for personal tax deductions for super contributions. The benefit of this strategy is that the taxed part of the TRIS is eligible for a tax offset of 15% and it is possible to claim a tax deduction for super contributions at your personal tax rate of up to 45%. Members that choose to draw on a TRIS must take a minimum amount each year equal to 4% of the account balance each financial year and no more than 10% of that balance. It would be worthwhile for members to do the maths to see whether it’s a worthwhile option.

Once a person has retired after reaching their preservation age, or are at least 65 years old, it is possible to start an account-based pension. The rules require the individual to take a minimum amount each year depending on their age, but the member can decide when to take it. The account-based pension could be taken weekly, monthly or even once each financial year, that’s up to the individual. Once the person is at least 60 years old, the account-based pension is totally tax-free when it is received. Between preservation age and 60 years of age, the taxable component of an account-based pension is taxed at personal rates. However, it is eligible for a 15% tax offset which reduces the person’s individual tax bill.

Another benefit of starting an account-based pension is that the income earned by the member’s super fund on investments supporting the pension is tax-free, which is an added bonus. But, there’s a catch – there’s a limit of $1.6 million applying to the total amount that can be transferred into retirement phase to commence the pension.

Members drawing down a TRIS or an account-based pension may wish their loved ones to benefit from what’s left in super when they pass on. Under these scenarios, there are two or three options to transfer death benefits to dependants such as the person’s spouse, their children or other dependants. The first is that the pension includes a reversion; the second it to make a binding death benefit nomination which can nominate the amount or a percentage of a person’s death benefit to be received by a dependant. And third, where the person has not left any instructions on the payment of their death benefit it will be up to the fund’s trustee and trust deed to distribute the benefits to dependants, their estate or both.

If a TRIS or account-based pension provides a reversion, it means the remaining balance on a member’s death goes automatically to their surviving partner, any of their children or other dependants, whoever is nominated. The alternative is to make a binding death benefit nomination to direct the trustee of the fund to pay the pension to dependants, including the member’s surviving partner or children. Any member who does not have either a reversionary pension or a valid binding death benefit nomination, the trustee of the fund may have authority to distribute the member’s super as permitted by the fund’s trust deed. So there are some very good reasons that a member has nominated who they wish to receive their death benefit.

Lump sums

Drawing a lump sum from super is considered much easier than starting a pension. However, there can be some hitches. To qualify to draw a lump sum in a fund, a member must have met their preservation age and retired or reached at least 65 years of age. The amount that can be withdrawn is usually limited to the person’s balance in the fund and this requires the fund’s investments to be valued accurately prior to payment of the lump sum. This is very important when investment markets are fluctuating widely as an over or under payment of the lump sum can lead to difficulties.

For anyone under the age of 60 lump sums are taxed, but the tax payable depends on:
    • the reason for paying the lump sum - such as retirement, disability or death;
    • who is to receive it - such as the member, dependant or adult child if a death     benefit lump sum is payable; and
    • whether the lump sum is made up of a tax-free and taxable proportion.

In most cases the accountant, tax agent or fund administrator will be able to calculate the amount of tax involved for the lump sum paid.

To get back to the bare basics, the main factors to consider in starting a TRIS, account-based pension or drawing a lump sum are for a person to draw down benefits when it suits them and make sure they understand what happens to any amount left over when they die. But the ultimate question is how much is required for retirement, which for some may mean going back to work so they can afford to retire.