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Taking out a pension before the age of 60 can often result in the fund being subject to higher tax rates… but not always. Taking out lump sums as opposed to pensions for members under 60 can sometimes save the SMSF tax if it is done correctly.

Lets first talk about preservation ages. Your preservation age is different to your Age Pension age in that it is the age at which you can retire and access your superannuation benefits. The relevant age of which it scales depends on your date of birth. If you have a client who is born before 1 July 1960, then their preservation age is 55. Currently the maximum preservation age is 60 and applies if you were born on or after 1 July 1964. Once you know your client’s preservation age it can be much easier to determine which withdrawal method will result in the lowest tax implications.

Ordinarily you can withdraw all or part of your super benefits when you satisfy a condition of release. A condition of release is usually met when an individual meets their preservation age and retires or alternatively when they turn 65.

Preservation Age Table

Pensions

Receiving pension payments under the age of 60 is generally less tax effective for the recipient.

If a member is under 60 and withdraws a pension, any taxable portion of the pension payment will be assessable in the member’s personal income tax return (less a 15% tax offset).

Example

• Member has a TRIS (transition to retirement income stream) and is aged 58
• Their members balance totals $500,000 and is spilt between $300,000 taxable (60%) and $200,000 tax free (40%)
• If the member makes a withdrawal of $20,000, the split between the payment will be $12,000 taxable and $8,000 tax free
• $12,000 will be assessable in the members personal income tax return

However, if a member is over 60 and withdraws a pension (having met a condition of release), the entire payment will be treated as a tax free payment.

Lump Sums

Lump sum payments are different in that they have a much higher tax free threshold.

If a member is under 60 and eligible to make a lump sum payment (i.e. they have satisfied a full condition of release), the amount will be used against the members low rate cap (see table below), resulting in the payment being tax free (so long as the amount is lower than the cap). Once the cap has been reached any further payments will be taxed at a rate of 15%, similarly to a pension payment explained above.

The low-rate cap is a lifetime cap, which means if you have taken advantage of this cap previously, then your cap will be reduced by the previous payment amount. However, if you are 60 years or older, the taxable component of a lump sum also becomes tax-free and therefore, you will not need to worry about the low rate cap as the entire payment is tax free (regardless of the component split).