Ask the Expert: Rules about the super transition to retirement

With some thought and planning you can build a better retirement.

With some thought and planning you can build a better retirement.

Question 1

  • I’m over 65 and still working part-time. I am considering moving my super into a Transition to Retirement phase account because I understand earnings are not taxed. If I move my super into a Transition to Retirement phase am I required to draw money from it?

Just a couple of points of clarification.

While you may be ‘transitioning into retirement’ by working part-time and possibly starting to draw on your super, as you are over 65 you will have a regular account-based pension, not a Transition to Retirement pension.

I know, it’s confusing.

If you were under 65 you could only use a Transition to Retirement pension, and investment earnings on those are taxed at 15 per cent, the same rate as regular super. Although payments from the pension are tax-free if you are 60 or older.

But as mentioned, as you have attained 65, you can set up a regular account-based pension where indeed all investment earnings are tax-free.

Yes, whether it’s a Transition to Retirement pension or an account-based pension, you are required to draw down at least minimum amounts each year. The minimum is a percentage of your account balance and is based on your age, as per the table below:

Question 2

  • I am planning to retire (aged 67) shortly with $400K in super and have two questions: I inherited the family home (which has been my principal residence since birth) a couple of years ago on the death of my mother, so I have not owned it legally until recently and thus do not qualify for the home downsizer contribution (I am about to sell the home for around $1.2m) as I have not owned it for 10 years. Is there any way to qualify? If I am not working, can I leave my super accumulating until I reach 75 (I have a second home and can support myself from the sale of the first home until then and plan to make $330,000 after-tax contributions to super each three years starting this June).

If I have read your question correctly, you are 67 and lived in the same home since birth – wow – that doesn’t happen much these days!

No, there is no way around that rule. You must have legally owned the home for a period of 10 years for you to be eligible to make a ‘downsizer’ super contribution.

As you have indicated, you can make non-concessional (after tax) contributions to super of $110,000 per year, (or $330,000 every three years using the bring-forward rule) up until age 75 as there is no work test required.

You can leave funds in the accumulation stage of super as long as you like, there is no requirement that you have to do anything. However, fund earnings in accumulation are taxed at 15 per cent, whereas fund earnings once converted to a pension are not subject to any earnings tax.

Therefore, if you had the same investment in accumulation and pension, say, a ‘balanced’ fund, the pension fund may achieve a higher return of up to 15 per cent.

For example, an 8 per cent return on the balanced fund in pension phase stays at 8 per cent. But in accumulation phase it may only net you a return of 6.8 per cent after tax (8 per cent less 15 per cent tax).

You may wish to consider converting some of your funds to pension earlier given the above, and keeping your accumulation account open. This will need to be balanced with the fact that you are trying to accumulate as much as you can in super while staying within the annual superannuation contribution caps.

You may want to obtain personal financial advice about your situation.

Question 3

  • I am retired and receive a small Centrelink age pension. My wife recently received a small increase in income. Assuming she pays 30 per cent tax on the increase my Centrelink pension is reduced by $0.50 for every extra dollar she earns. Her increase is therefore only $0.20 for every extra dollar she earns. Her employer is prepared to increase her super guarantee by the amount of the increase. Will this stop my decrease in Centrelink payment? Interest rates on our $75,000 home mortgage have increased. Can she access this from her super? My wife is currently 62 and plans to retire at 65.

You are correct in that your wife’s employment income does get included in the assessment of your age pension benefits. And if you are income tested then your payment will reduce. This assumes you have already exceeded the income-free amount of $360 per fortnight (combined).

However, it is only reduced by $0.25 for every additional dollar earned. If you were single and you exceeded the income threshold it would be $0.50. Or if you were both age pension age, then it would be a reduction of $0.50 combined ($0.25 each). So, not as bad as you thought.

You are also correct that super guarantee payments do not count under the income test. However, if the employee has any discretion to increase this amount above the legislated minimum, then it will still be counted by Centrelink.

Your wife can’t make lump withdrawals from super unless she meets a condition of release, such as switching jobs after the age of 60. However, she can convert some of her super to a Transition to Retirement pension then make an annual income payment of up to 10 per cent of the pension starting balance.

Note that while the funds are in pension phase, they will be asset tested and deemed under the income test against your age pension. Therefore, if you do adopt this strategy, you may wish to roll back the pension to super once the income payments have been made so it only affects your pension payments for a couple of fortnights.

You should consider seeking financial advice about this or speak with your super fund.

Craig Sankey is a licensed financial adviser and head of Technical Services & Advice Enablement at Industry Fund Services

Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.

Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.

The New Daily is owned by Industry Super Holdings

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