Turning 60 is an important milestone for anyone and often inspires us to rethink what we are doing with our lives and what we plan for the future.
It is also an opportune time to review your superannuation, because lots of things about super change when you hit 60.
Till then, for most people, the reality has been work and building up your super through the super guarantee contributions made by your employer along with salary sacrifice or non-concessional contributions you make.
At 60, lots of things change, but only if you make changes yourself.
If you plug on working for the (wo)man then you keep paying income tax on your income, increasing your super contributions and earnings inside your fund.
Preservation age
Hitting 60 means reaching what is known as ‘preservation age’ for most people on super.
Once this age is reached you can access your super without paying a tax penalty.
There’s a catch, however.
“It’s important to remember that turning 60 does not automatically give you access to your super. But if you have retired or ceased work, then your superannuation is accessible,” BDO Superannuation Partner Shirley Schaefer said.
Pension account
If you formally retire or quit work then you can move your superannuation money from an accumulation account to a pension account.
Once you do that you can set up an allocated pension, which pays you a minimum amount set by regulators.
Under 65 it is at least 4 per cent of your pension account balance, rising to 5 per cent at 65, eventually reaching 14 per cent if you get to 95.
You can also draw out a lump sum to pay down the mortgage, do a renovation or have a holiday.
The beauty of being in pension mode is that pension payments become tax free and earnings in the fund are also no longer taxed.
That means you can start spending your super and have the remaining funds in your account increase more quickly because they won’t be subject to a 15 per cent tax on earnings.
“Turning 60 is tax heaven. Well…almost. If you are withdrawing benefits from your super after age 60, either as a pension or as lump sum benefits, those monies are tax-free in your hands,” Schaefer said.
“Having paid tax on the way through finally becomes worthwhile.”
So you can withdraw as much as you like in pension payments and change that year to year depending on your need as long as you take out the minimum for your age group.
Flexibility
The system is extremely flexible because you can start work again if you find retirement boring or get a new lease on life.
However you can’t retire on Friday and start work again on Monday.
“If you choose to commence a pension or income stream from your super once you’re 60, not only are the monies tax-free in your hands, but there are significant tax benefits to your superannuation fund as well,” Schaefer said.
“Income from assets supporting a pension is not taxed in the super fund. But remember, if you are drawing a pension, you must meet minimum payment requirements to qualify for these tax concessions.”
Another advantage is that if you do legitimately start working again then you can open another super accumulation account and make contributions to start to build up your super again.
Remember you can only move $1.9 million into a pension account.
If you retire with more than that you will have to keep the balance in an accumulation account where its earnings will be taxed.
Transition to retirement
If you do want or need to work on, hitting 60 gives you another option – taking a transition to retirement (TTR) pension.
This allows you to start a tax-free super pension while you work.
Because your super pension would be tax free you could afford to make bigger tax concessional super contributions.
That in turn would cut the tax on your salary (because super contributions are taxed only at 15 per cent) and allow you to build a bigger super balance.
While TTR pensions are untaxed, earnings on a TTR pension are taxed at 15 per cent. However it is still an attractive strategy for many who can use it.
Bridging the gaps
There are a couple of effective strategies available for couples with significant age and superannuation gaps involving superannuation splitting.
Where one party in the couple is below preservation age the younger person could pay into the older person’s account to allow use of the tax-free super money for the enjoyment of both.
Alternately the older person could withdraw some of their super and pay it into the younger person’s account so the older one could draw more age pension.
Seek advice before using either strategies because the ability to pay into another person’s account will be restricted by various contribution caps.
Contributions caps are as follows. Currently concessional contributions are limited to $27,500 a year, but where there is less than $500,000 in a fund, up to five years of caps can be bundled and paid in at once.
Non-concessional caps – those you don’t get a tax benefit for – are limited to $110,000 in the current year but can be grossed up for three years. They can only be made into funds with less than $1.9 million.
Both concessional and non-concessional caps will be increased after June 30.
“The best advice if you are unsure is to seek advice, whether from your super fund, your accountant, or your financial planner,” Schaefer said.
This article originally appeared in The New Daily and was adapted with comment from BDO.
