Ask An Adviser - Should I Draw From My Super During Retirement If I Do Not Need To? (2)

Top answer provided by:

Sarah Roelofs

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Hi Chris,

Thanks for your question, and congratulations on your impending retirement. 

There are a couple of parts to this question, which you should consider before making your decision. 

The first relates to whether you will be meeting a full condition of release or not. 

In order to access a tax-free pension, you must meet a condition of release, which usually has two main components. The first is an age test, known as preservation age. As you are over 60, you have already met this part. However, between age 60 and 65, you also need to cease an employment arrangement, or retire.  

As you have mentioned you will continue to receive an income, it is unclear whether you will meet this part of the condition. This will have important consequences for the tax status of your pension, should you choose to commence it next year. If you have not satisfied the employment component of the test, you will still be able to commence a pension, however it will be what’s known as a “Transition to retirement” (TTR). While the payments for both types of pension will be tax free to you either way, the difference is that with a TTR Pension, you will still pay 15% tax on earnings in the account. So, if you don’t need the income, there is no real benefit to commencing this type of pension.

Assuming you “retire” and therefore meet a full condition of release, the advantage of commencing a pension is that this will turn off the tax on the account. If you keep the funds in accumulation phase you will be paying 15% tax on earnings, so there is an obvious immediate tax advantage to the pension. An added bonus is that if you return to work after meeting a condition of release, your super balance at the time will remain unpreserved, so you will continue to have unrestricted access to the funds should you need them.

However, there are a number of consequences that should be considered prior to making your decision, including:  

Minimum pension payments

Once in pension phase, to obtain the tax-free benefit, you must draw a minimum amount from your pension each year. This varied by age, but for you, this will be 4% of the balance of the account. If you don’t need the income, this requirement means you will potentially be eroding your retirement savings, which you will undoubtedly need down the track once both your and your partner’s other sources of income cease.

Cancellation of insurance benefits

If you are intending to roll the full balance of your super into pension phase, any insurance you hold within super will cease at this time. Ensure that you no longer require this cover prior to closing the account.

Markets

Over the past couple of years we have seen heightened volatility in investment markets. Assuming you have some growth component to your portfolio, it’s likely that the value of your super may have dropped somewhat over this time. Consider whether it is a good idea to withdraw from your account while markets are down, or if you are better to wait for a recovery. It’s possible that withdrawing while markets are down may outweigh the tax benefits of rolling to pension phase.

There are ways to counteract these disadvantages however, including a recontributions strategy, which involves making additional contributions back into super, which would often be equal to the pension payment you have drawn. In this way you can still take the tax benefit while minimising the impact on your overall balance, and you can now continue to make contributions well into your 70s.  However, I would recommend speaking with a financial adviser before embarking on this, as your account balance and personal income tax rate are important factors in determining whether this is a worthwhile strategy for your situation, as well as assistance in managing contributions caps.

While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.

Article by:

Sarah Roelofs

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