When one reaches his/her superannuation “preservation age”, then some or all of the entire super account balance can be accessed, once a condition of release has been satisfied.
The official preservation age is rising and now stands at 56. At this age someone can retire from full-time employment and access their accumulated super as a lump sum or in account-based pension phase.
There are tax considerations for people accessing super prior to reaching age 60.
For your normal non-Government super fund there is a once-in-a-lifetime tax-free threshold of up to $195,000 which can be accessed by someone under 60 (who has satisfied a condition of release) tax-free; the excess over this amount that is withdrawn is taxed at 15 per cent plus the Medicare levy until the person reaches the age of 60 – the golden age for super – when all drawings are completely tax-free, either as a lump sum or in an account based pension payment.
For someone under age 60, account based pension payments are basically taxable at normal rates and provided a 15 per cent tax rebate.
This stands unless their pension has a tax-free element, as this percentage will be received tax-free in the pension payment. (Tax-free elements in pensions of people aged below 60 are now usually not significant nor the norm. They typically involved either pre-1983 components for early service or after-tax contributions to the original super account.)
People who have reached their preservation age of at least 56 (under legislation current and prior to the May 2016 budget) may also start an account based pension, even if they are still working.
This is often referred to as a Transition to Retirement strategy. The transition to retirement pension will have a minimum amount of four per cent of the account balance which must be withdrawn and a maximum of up to 10 per cent which may be withdrawn.
A worker may reach age 60 with a transition to retirement arrangement in place and the pension payments then become tax-exempt and do not need to be included in tax returns.
There has been much discussion in the press as to the worthiness this strategy and many commentators think that this option may in the near future no longer be available to new participants, especially those people working full-time. Once the person reaches age 65 they have unrestricted access to all of their super and account based pension accounts whether working or not and all withdrawals are tax-free.
There has been something of a thought revolution regarding superannuation over the past 10 years or so.
It may be fair to say that some people in bygone eras regarded super as an immediate reward for a lifetime of hard toil. Some retirees were quick to withdraw lump sums to finance their retirement dreams.
If they had not yet reached age pension age and did not qualify for a Centrelink benefit, then many simply chewed up these savings in financing their lifestyle in the first few years of retirement.
Some people enthusiastically invested in motorhomes and luxury holidays; others simply used super to reduce their debt levels and for some to finally pay off the mortgage on the family home.
These practices were perhaps a factor of smaller super balances at retirement. Older workers (public sector workers excepted) usually had no employer support of this type early in their working lives.
With the longevity and success of the superannuation and retirement system, super balances at retirement are now improving. The average super retirement balance for a male is now close to $200,000; however, women lag badly; even today 60 per cent of women between ages 65 and 69 have no superannuation at all1. This is a massive social concern. Women in retirement are often alone, either by choice or divorce or the death of their partner.
Many find themselves struggling as they are now solely responsible for handling their own finances. Some women unfortunately live longer on much less than their male counterparts during the retirement phase of life.
With the exception of these gender inequity issues in super, the system overall has been an outstanding success.
There is every reason to be optimistic that future generations will not tolerate any inequity between the pay and work conditions of females and males.
In the future both males and females should retire with substantial stores of wealth in super to supplement their retirement lifestyles.
While there will continue to be at least three-quarters of retirees of Age Pension age receiving some Centrelink pension support, there will be less dependence on the full Age Pension over time.
From 1 January, 2017, a homeowner who is single can have assets outside of the family home (which is Centrelink-exempt to any value) worth $250,000 before any pension is lost due to the assets test.
For a homeowner couple these savings, which for many will comprise mainly their superannuation and bank deposits, amount to $375,000. The couple will not lose all pension support under the assets test until their assets exceed $810,500 and we must continue to remember that this excludes the value of the family home.
If at retirement there is still a mortgage on the family home then it is natural to use some super in the form of a lump sum payment to eliminate or reduce this liability. There is no advantage to the age pensioner to have a mortgage on the family home, as this is an exempt asset for Centrelink purposes.
This is one of the most sensible reasons to seek a lump sum out of super.
Overall there is a growing trend to finance retirement comfort using an account-based pension income stream.
Apart from the psychological effect on the retiree of receiving their own retirement pay-cheque in addition to the Age Pension, these retirement savings are the padding that allows the retiree to take control of their future security and comfort.
Account-based pensions allow this type of control as the pensioner has full access to capital and can adjust their regular pension payment to support varying levels of discretionary spending.
This may be especially important in the early years of retirement when travel plans may be most attractive. Without any retirement savings, retirees on the full Age Pension are at the mercy of the Centrelink Age Pension system. They have little choice in how they live, as basic living costs probably consume their entire pension.
Colonial First State recently released data showing that 83 per cent of the value of all superannuation retirement benefits in 2013-14 was invested in superannuation pensions.
Only 10 per cent of retirement assets were taken as a full lump sum, while the remainder was taken as a partial lump sum.
The myth that ‘older Australians quickly access and spend their superannuation savings as lump sums and then fall back on the full age pension’ is almost dead and buried.
Furthermore, Rice Walker Actuaries predict that 96 per cent of all retirement benefits will be taken as a pension by 2025 in accordance with the maturation of the superannuation system. Australians have a much closer relationship with their super savings than in the past.
They identify and value their super and pension accounts as their personal retirement savings in much the same way as their dollars held in precious bank accounts of old.
1. ASFA 2014 release by Ross Clare 2014. 2. Parliamentary estimates based on Department of Social Services, Income support customers: a statistical overview 2012, Statistical Paper No. 11, January 2014. This article has been prepared by SCS Super Pty Ltd [ABN 74 064 712 607, AFSL 230544, RSE L0002264], the Trustee of the Australian Catholic Superannuation & Retirement Fund. The views, opinions or recommendations of the writer are solely their own and do not in any way reflect the views, opinions and recommendations of Australian Catholic Superannuation & Retirement Fund and they may change in the future. GENERAL ADVICE WARNING: Any advice contained in this article is of a general nature only, and does not take into account your personal objectives, financial situation or needs. Prior to acting on any information in this article, you need to take into account your own financial circumstances, consider the Product Disclosure Statement for any product you are considering, and seek independent financial advice if you are unsure of what action to take. Financial advice is available to members through an arrangement with Industry Fund Services Pty Ltd (AFSL 232514). Call us on 1300 658 776.
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