Preservation Age to 59 & Retired

 

 

Preservation Age

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

 

 

Accessing your Super Benefit when aged between Preservation Age and 59 and "Retired"

If you are aged between preservation age and 59 your Super Benefit is preserved until your "Retirement". There are absolutely no restrictions to accessing your Super Benefit when aged between preservation age and 59 after you are "Retired". In this case your Super Benefit can be accessed as either a Pension or Lump Sum withdrawal.

 

 

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 "Retired"

When you are aged between preservation age and 59 and "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 a "Simple Account Based Pension" and a "Transition to Retirement Pension". When you are aged between preservation age and 59 and are "Retired" you can only commence a Simple Account Based Pension.

If you do decide to commence a Simple Account Based Pension from your SMSF and are aged between preservation age and 59 and are "Retired", then you must take a minimum pension income per year. For more information on the minimum pension amount, please click here. There is no maximum pension amount if you are aged between preservation age and 59 and are "Retired" and you are free to access all your Super Benefit as desired. 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 Member's tax rate less a 15% Pension Rebate.

Example:

As an example assume you have a Super Benefit of $500,000 made up as follows:

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 (ie $20,000). The Pension withdrawn of $20,000 will be 80% tax free (ie $16,000) and 20% taxable (ie $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 2023 and are 59 at that time. On 10 March 2024 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 2024, 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 2024, when you turn 60, then the Pension withdrawn will be tax free.

 

 

Tax Savings when you commence a Pension

Given that minimal tax may be payable on Pension withdrawals when aged between preservation age and 59, it may still be advisable to commence an SABP even when aged between preservation age and 59 and “Retired”, given you pay no tax on the earnings and realised capital gains in the SABP account. However you will need to assess your own individual circumstances to determine if a Pension should be commenced. To see the potential Tax Savings associated with commencing a Pension view our Case Study here.

 

 

Lump Sum withdrawals when aged between Preservation Age and 59 and "Retired"

The alternative way to access your Super Benefit when you are aged between preservation age and 59 and "Retired" is a Lump Sum withdrawal. A Lump Sum withdrawal is an amount accessed from your SMSF that is not a Pension payment. You can make Lump Sum withdrawals whenever you like from your SMSF once you are aged between preservation age and 59 and "Retired".

 

 

Taxation of Lump Sum Withdrawals between Preservation Age and 59

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 Lump Sum withdrawals must be paid in the same proportion as the Tax Free and Taxable Components of the Member's interest in the SMSF. This requirement is known as the "Proportioning Rule".

Under the "Proportioning Rule" and where the Member is aged between preservation age and 59, the "Tax Free" Component of the Lump Sum withdrawal is tax free. The "Taxable" Component of the Lump Sum withdrawal is taxed as follows:

The amount up to the low rate cap amount is tax free.
The amount above the low rate cap amount is taxed at 17%

 

 

Low rate cap amount

The application of the low rate threshold for super Lump Sum payments is capped. The low rate cap amount is reduced by any amount previously applied to the low rate threshold.

 

 

Calculating the Tax on Lump Sum Withdrawals between Preservation Age and 59

The process to calculate the tax on Lump Sum 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 Lump Sum withdrawal by the Tax Free percentage at Step 4. The result is Tax Free.
• Step 7: Multiply the Lump Sum withdrawal by the Taxable percentage at Step 5. The result is taxed at:
  • The amount up to the low rate cap amount is tax free.
  • The amount above the low rate cap amount is taxed at 17%

Example:

As an example assume you have a Super Benefit of $500,000 made up as follows:

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 Lump Sum withdrawals will be tax free and 20% will be taxable where the Lump Sum withdrawals are made between preservation age and 59.

Assume you decide to access $100,000 as a Lump Sum withdrawal in the 2023-2024 Financial Year and are eligible to do so. In this case 80% of the withdrawal amount will be tax free and the balance will be taxable, namely 20% of the $100,000 or $20,000. The $20,000 assessable amount is then taxed as follows:

• The first $235,000 of your Taxable Component is tax free.
• The Taxable Component above $235,000 is taxed at 17%

In the above example as the taxable portion of the Lump Sum of $20,000 is less than $235,000, it is tax free.

 

 

Can I choose the withdrawal types?

If you have NOT commenced a Pension from your SMSF all withdrawals made from your SMSF will be treated as a Lump Sum withdrawal when aged between preservation age and 59 and “Retired”. Alternatively, if you have commenced a Pension from your SMSF, you have the choice to make either Pension or Lump Sum withdrawal in addition to the annual minimum pension amount, which must be made as Pension withdrawals.

We caution that Pension withdrawals and Lump Sum withdrawals are two different withdrawal types and different rules apply. For more information on the difference between Pension withdrawals and Lump Sum withdrawals, please click here.

 

 

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

If you are aged between preservation age and 59 and "Retired", you are not required to access your Super Benefit as either a Pension or a Lump Sum Withdrawal. The choice is entirely yours. In fact you can let your Super Benefit accumulates in the super environment indefinitely. It is noted it may be tax advantageous to commence accessing your Super Benefit when aged between preservation age and 59 as a Simple Account Based Pension (SABP) when "Retired". This is because when you commence a Simple Account Based Pension you never pay tax on the investment income and capital gains in the SABP account. However the amount of superannuation benefits that you can use to commence an SABP is limited by the Transfer Balance Cap. For more information on Transfer Balance Cap, please click here. It should be noted that any monies you access as a Pension may be taxable as detailed above.

 

 

Contributions when aged between Preservation Age and 59 and "Retired"

If you are aged between preservation age and 59 and "Retired", you can still contribute to superannuation (subject to the contribution rules). These contributions are not preserved and can be immediately withdrawn as a Lump Sum or Pension (if you have commenced an additional SABP using the contribution amount) at any time following the contribution.