With life expectancy longer than ever, people are increasingly encouraged to access their superannuation in pension mode rather than lump-sum withdrawals to help ensure it will last through their retirement years. However, those setting up a pension must ensure they comply with the withdrawal obligations each year.
Australians have one of the highest life expectancies in the world. Recent research by Accurium, a provider of actuarial certificates for Self Managed Super Funds (SMSFs), in a paper called ‘SMSF Trustees – healthier, wealthier and living longer’, estimates the average life expectancy of a 65-year-old male SMSF trustee is 90 and for a female 92. This is about three years longer than for the average Australian (3.0 years longer for men, 2.4 years longer for women) because SMSF trustees are usually wealthier and have the resources to pay for good health care.
In fact, it will become common for Australians to live to 100 and beyond, because:
- The life expectancy estimates are averages and there will be significant individual variations
- There is a consistent trend of people living longer than expected.
With such long lives, retirees need to balance their need for income with ensuring their money does not run out. There are some specific circumstances where superannuation can be accessed early, but generally the ‘conditions of release’ when aged between 60 to 64 years require ceasing employment, with full access on reaching 65. If you have reached ‘preservation age’ (at least 55 if born before July 1960, or from 56 to 60 if born later) and have met withdrawal conditions, you can establish a transition to retirement (TTR) superannuation-based pension. You should ensure you understand the legal requirements and tax implications, some of which will change on 1 July 2017. Pension calculations are tied to the financial, not calendar, year.
Starting an account-based pension
To start an account-based pension, you need to transfer a lump sum from your accumulation account to a pension account. From 1 July 2017, limits will apply to the amount you can transfer. The so-called transfer balance cap will begin at $1.6 million and will increase in line with the consumer price index. Once you have used your entire cap, you can’t top it up.
In addition, minimum withdrawal amounts apply to account-based pensions and are set each year based on your age and account balance on 1 July.
Source: ASIC MoneySmart
If you are between preservation age and 65 and still working, the maximum you can withdraw is 10% of your pension account balance each financial year. You cannot withdraw money as a lump sum.
However, on reaching the age of 65, you can withdraw all your money from superannuation under the current rules, even if you have not retired. This obviously depletes the money you have to live on for the rest of your life and should be done with great caution.
Pension payments can be taken monthly, quarterly, half-yearly or annually, provided there is sufficient balance to cover the pension. You can transfer funds back to your accumulation account at any time.
Advantages of account-based pensions over accumulation funds
From the age of 60, your pension payments become tax-free. Between the ages of 55 and 60 using a TTR pension, tax will be applied on the pension payment at your marginal rate less a 15% tax offset.
TTR pensions have been popular with Australians since their introduction in 2004. They have enabled working people under retirement age to reduce their work hours as a way to ease into retirement, with the TTR pension from the super fund supplementing employment income.
However, from 1 July 2017, earnings on TTR pension accounts will be subject to a 15% earnings tax. This legislation is retrospective, meaning that even accounts started before that date will also be subject to the ruling.
People should discuss their TTR account with a financial planner before July 1 to assess its continued viability. In some cases, cancelling the TTR account and returning to an accumulation fund could be the best option.
Does an account-based pension affect the age pension?
Eligibility for the age pension depends on Centrelink’s assets test rules, which include assessment of your entire account-based pension balance. Income from your account-based pension is also fully assessed, unless you began your account-based pension before January 1, 2015, in which case only part of that amount will be included in the eligibility test.
Talk to your financial adviser or Centrelink to discuss how the account-based pension income might affect your eligibility for the age pension.
Conclusion
Retirement savings are not guaranteed to last for life, as factors such as withdrawal amounts, investment returns and future legislative changes could affect balances. As with all major decisions concerning a retirement nest-egg, it is wise to consult an independent financial planner for advice.
Because the changes to account-based and transition-to-retirement pensions are now only a few months away, Australians in or nearing retirement should review their arrangements soon rather than leaving it until it might be too late to head off penalties for non-compliance.
Further information is available at MoneySmart or directly from the ATO web site.
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