Super News - Pensions & benefit withdrawals

09 October 2018

Hardeep Athwal, Manager, Superannuation |
Shirley Schaefer, Partner, Superannuation |

The past two years have seen significant change in our understanding of what type and how much individuals can have in pension phase within their superannuation funds.  With all the hype around the new Transfer Balance Cap and the ATO’s Transfer Balance Account, it’s time to go back to basics on benefit payments.

What type of ‘super pensions’ are available?

The two most common super pensions in Australia that can be established inside a super fund are the Account Based Pension (ABP) and the Transition to Retirement Income Stream (TRIS). These pensions can offer a flexible range of draw down options to suit your needs based on your current super balance.

An ABP can only be accessed if the member has met a full condition of release to access monies from their superannuation fund (Refer Table 1 – Accessing your super – Conditions of Release).  Once an ABP has been commenced a member must draw a minimum pension at least annually, but can draw as much from their pension account as they wish.

The main differences between ABPs and TRIS’s are that TRIS’s have a maximum annual draw down limit of 10% of the pension account balance and the assets supporting a TRIS no longer enjoy income tax concessions inside the superannuation fund.

The benefit of a TRIS is that you can commence a TRIS while still working, once you have reached your preservation age (Refer Table 1 - Accessing your super - Conditions of release).

Two things to keep in mind with ABP & TRIS pensions are:

  • They are not guaranteed for life, so you could manage to prematurely draw down the entire pension account balance (longevity risk)
  • Pension account balance is linked to the super fund’s performance and will fluctuate in-line with the investment markets (investment risk).

There are other types of super pensions available in Australia, however, they can no longer be commenced in a Self-Managed Super Fund (‘SMSF’).

Accessing your super

 The rules about when you can access your super can be a little confusing depending on your age and employment status, but in all cases you need to satisfy one of the following ‘conditions of release’:

Age Condition of release Type of pension
Age under 55 Total or permanent disability ABP
Age 55 – 64 Over preservation age – if still working
(partial condition of release)

Over preservation age and permanently retired
Age 60-64 Ceased an arrangement of employment

Over preservation age and permanently retired
Age 65 Turning age 65 years ABP

Table 1 – Accessing your super – Condition of release

It should not be forgotten that where a superannuation fund member has met a full condition of release, they are able to access Lump Sum Benefits instead of or as well as pension benefits.  The only limitation is that members with a TRIS pension are not able to access Lump Sum benefits (as they have not met a full condition of release).
The ability to access superannuation benefits is largely driven by a member’s preservation age.  We are currently in a span of time where the preservation age is gradually increasing.  So a member’s preservation age depends on their date of birth.  Refer Table 2 – Preservation Ages.

Preservation Age Date of Birth
55 Pre 1 July 1960
56 1 Jul 1960 – 30 Jun 1961
57 1 Jul 1961 – 30 Jun 1962
58 1 Jul 1962 – 30 Jun 1963
59 1 Jul 1963 – 30 June 1964
60 Post 1 Jul 1964

Table 2 – Preservation Ages

Pension income streams post 1 July 2017

Removal of tax exemptions for Transition to Retirement Income Streams

Effective from 1 July 2017, the government removed the tax exempt status of super fund earnings for assets supporting a transition to retirement income stream (TRIS). Until 30 June 2017, the investment earnings on super assets financing TRIS income streams were exempt from tax, however earnings will now attract tax at 15% on investment earnings. This change applies to all TRIS income streams, regardless of their start date.

As soon as a member has met a full condition of release, the TRIS will become a “TRIS in Pension Phase” and the earnings from assets supporting the TRIS will be eligible for exemption from income tax (subject to the member’s Transfer Balance Cap).

To meet a full condition of release, a member must retire or cease an arrangement of gainful employment (once past their preservation age) or turn age 65 years.

Transfer Balance Cap - Maximum Pension Account Balances $1.6million

From 1 July 2017, the Government introduced a Transfer Balance Cap (TBC) of $1.6 million per person. This means that all individuals now have a maximum amount of benefits which can be held in a pension account and receive concessional income tax treatment. Any increases in the pension account due to net investment earnings exceeding pension withdrawals will not be restricted and can remain in the pension account, but commencement of new pension income streams will be restricted.

The effect of this ‘maximum pension account balance’ is twofold:

  • Only those assets supporting these pension accounts are eligible for ‘zero tax’ on the investment earnings of those assets (or be considered tax free)
  • This now limits the amount that can ultimately be withdrawn as tax free pensions for individual tax payers.

The transfer balance cap is be indexed annually in accordance with the Consumer Price Index (CPI) but the TBC amount will only be increased in $100,000 increments.

If an amount is transferred to a pension account that exceeds $1.6 million, the excess amount will be treated in a similar way to excess non-concessional contributions, with a tax charge applying.

The introduction of the TBC does not change the minimum pension rules that apply to superannuation pension accounts.  A member is still required to withdraw a minimum pension at least annually.  The minimum pension amount is determined by reference to the minimum pension table (as calculated on the member’s account balance at 30 June of each year).

Age at 1 July Minimum Withdrawal
Under 65 4%
65 – 74 5%
75 – 79 6%
80 – 84 7%
85 – 89 9%
90 – 94 11%
95 and over 14%

The Pension minimum limits for 2018/19

TRIS Members: You can only withdraw a maximum annual pension payment amount of 10% of the account balance calculated on the day the pension commenced for the year the pension commenced, or on 1 July for each subsequent year .

What happens if you under pay your pension?

If a super fund doesn’t meet the minimum pension payment requirements for a particular financial year, the super pension is deemed to have ceased. The tax implications of this are that the super fund will not be able to claim the tax exemption on all income and capital gains generated by the pension asset.

Pensions and death of a member

The tax treatment of death benefits is unchanged from previous financial years, with dependants under the tax laws (spouses and children under the age of 18), continuing to receive death benefits free of tax, and non-dependents (financially independent adult children) liable for 15% tax (plus tax levies) on the taxable component of the death benefit.

When a member passes away, their TBC ceases and their superannuation benefit must be dealt with in accordance with the Super Fund’s Trust Deed or any Binding Death Benefit Nominations. If a surviving spouse is in receipt of a reversionary death benefit pension, the surviving spouse will have the value of the pension added to their own TBC (12 months from the date of death of the member).  If death benefits are paid from the superannuation fund as a death benefit pension, the value of that pension will be added to the recipients own TBC on the date the death benefit pension commences.  

The law requires the trustees of superannuation funds to death with the death benefit ‘as soon as practicable’ following the members’ death. With the changes introduced by the TBC, we recommend superannuation fund members seek specialist advice on estate planning matters.

Pensions, Lump Sums and Documentation

Where a member has met a full condition of release, those members are able to access lump sum benefits from their superannuation member accounts, either from their pension accounts or from accumulation accounts. 

It is now very important to properly characterise and document payments from superannuation funds as either pension payments or lump sum benefits.

We recommend that members seek specialist advice from their superannuation or BDO Adviser.

Disclaimer: Please be advised that the information contained in this article is purely factual in nature and does not take into account your personal objectives, financial situation or needs. The information is objectively ascertainable and, therefore, does not constitute financial product advice. If you require personal advice that takes into account of your particular objective, financial situation or needs, you should consult BDO in our licensed capacity.