Preparing for the shift to retirement:
Key information to keep in mind
If you are nearing retirement, it is likely that you have already considered how to access your retirement savings from your superannuation fund.
In general, there are several choices available to you once you reach the minimum age required to access your super, known as the ‘preservation age’.
For individuals born after the 1st of July 1964, the age at which you can access your super is 60 years old.
You have the option to find out your individual preservation age on the Australian Tax Office Platform.
When it comes to choosing how to fund your retirement, it ultimately depends on what is most suitable for your situation.
Leaving Your Super Alone
If you choose not to touch your super savings upon retirement, there is no requirement to start withdrawing them. You have the option to leave your super untouched if it is not needed for your expenses. It is possible to continue investing in your super and even make additional contributions if you earn extra income. These contributions can be made up to the annual limit and are subject to certain tax rates. Contributions can be made voluntarily up to the age of 75, excluding specific contributions related to downsizing a home. Employer contributions can be made at any age. By not initiating a pension plan, you are not obligated to make regular withdrawals as mandated by the government. Individuals aged 55 and above have the opportunity to add a significant amount to their super account by selling their primary residence, with certain conditions applying. It is important to note that leaving your money in a super accumulation account will result in continued taxation of investment earnings at a rate of 15%.
This rate is generally lower than the tax rate applied to other investments such as rental income from properties. Keeping all funds in your super after retirement means you cannot receive regular pension payments from the super fund. To do so, it is typically necessary to transfer some funds into an account-based pension. Most super funds allow for lump sum withdrawals under specific conditions, with a minimum balance requirement typically in place. Additionally, leaving funds in your super account or pension may have tax implications for non-dependent beneficiaries in the event of your passing.
Starting A Pension Stream
On the flip side, if you aim to utilise your entire superannuation savings to receive a regular income after retirement, it is necessary to transfer it into a pension account.
You must get in touch with your superannuation fund manager for this process, or in the instance of a self-managed superannuation fund, ensure that the trust deed permits the provision of a pension income stream.
Your primary choices include either transferring your superannuation into a pension product offered by your current fund or moving it to another pension product provider.
Most pension products offer the option of receiving monthly, quarterly, semi-annual, or annual payments, which will continue until your account balance is depleted.
It is important to note that once you commence a pension, you are obligated to withdraw a specific percentage of your account balance each financial year, with the percentage increasing as you get older.
The minimum withdrawal amounts for pension accounts are outlined on the Australian Taxation Office’s website.
There are numerous benefits associated with establishing a pension income stream as opposed to leaving your superannuation funds in accumulation mode.
Crucially, if you are over 60 years old and have retired, the pension payments you receive are exempt from taxation, as are any investment profits generated within your pension account.
You have the option to use your pension income stream to complement the government Age Pension if you meet the eligibility criteria. Additionally, you have the flexibility to withdraw lump sums from your pension account whenever necessary.
In the event of your passing, non-dependent beneficiaries who inherit funds from your pension account will be subject to taxation on the taxable portion. However, tax offsets may reduce the amount of tax payable in this scenario.
Doing Both
If you desire complete financial flexibility during your retirement years, you might want to consider a strategic approach. This could involve keeping a portion of your funds in your superannuation account, transferring some into an account-based pension, and taking out lump sum payments as needed.
There are various advantages to implementing this combination strategy, but it’s essential to be aware of the potential tax implications for both yourself and your beneficiaries.
Managing a mix of a super accumulation account, an account-based pension, potential investment returns outside of super, an Age Pension entitlement (if applicable), and irregular lump sum withdrawals can be quite intricate.
It would be beneficial to seek guidance from a qualified financial advisor as you navigate through the multitude of retirement options available to you.
Important note: This information is general and does not account for your specific circumstances. It’s crucial to evaluate your individual situation before making any decisions.
Source: Vanguard May 2024
This article has been reprinted with the permission of Vanguard Investments Australia Ltd. Copyright Smart Investing™
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