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
|Date of Birth||Preservation Age||Will reach preservation age|
|Before 1 July 1960||55||Before 1 July 2015|
|1 July 1960 to 30 June 1961||56||1 July 2016 to 30 June 2017|
|1 July 1961 to 30 June 1962||57||1 July 2018 to 30 June 2019|
|1 July 1962 to 30 June 1963||58||1 July 2020 to 30 June 2021|
|1 July 1963 to 30 June 1964||59||1 July 2022 to 30 June 2023|
|After 30 June 1964||60||After 30 June 2023|
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).
- 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 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.
Amount of cap
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).