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Page last updated Friday, 04 December 2009
Self Managed Super Funds Bulletin - Issue 56: December 2009
One of the great benefits of superannuation is to receive a tax free pension once you reach age 60. If you are under age 60 then the taxable part of your pension is taxed but is eligible for a 15% tax offset.
An added benefit of being in pension phase is that any income and capital gains on investments in the superannuation fund which are paying the pension are also tax free. If you leave your superannuation in accumulation phase income and capital gains in accumulation phase are taxed in the fund at 15%.
Did you know it is possible to have superannuation benefits in pension phase and be able to draw a lump sum from your pension account in the fund? It’s a bit like having your cake and eating it too.
Under the current superannuation rules there is basically only one type of pension that can commence from a superannuation fund – the account based pension. As the name suggests this type of pension is calculated on the balance in your pension account when it commences and every 1 July thereafter. You can commence an account based pension once you have retired after age 55 or from age 65, whatever comes first.
The balance in your account based pension account can go up or down depending on the investments you have selected. If your investments go well then their value and the balance in your pension account may increase. But if they don’t do so well their value may decrease and so will your pension account balance. Withdrawals from your account based pension account such as pension payments, lump sums and fees will also reduce the account balance. For this reason it is worthwhile to keep an eye on the amount being withdrawn to ensure it will last as long as possible.
You may not think it means a great deal once you have reached age 60 that there is any difference between drawing a pension from your fund and drawing a lump sum because they will be tax free. However, it does matter for superannuation as well as Centrelink purposes whether a lump sum or pension has been withdrawn. For superannuation purposes it is not possible to have a pension paid as an in specie transfer of investments and for Centrelink purposes an amount withdrawn as a lump sum from a pension will count for assets test purposes rather than income test purposes.
A lump sum, unlike a pension, can be paid either as an amount of money or as an in-specie transfer of assets. Before paying a lump sum the fund’s trust deed should ensure it is possible to pay lump sums from the pension. Conversion of a pension, in whole or in part, to a lump sum is referred to as a commutation of the pension.
Before the lump sum is paid the superannuation legislation requires the pensioner to notify the superannuation fund that the next payment they wish to receive from their account based pension is to be treated as a lump sum. This should be documented in the minutes of the superannuation fund to ensure that the superannuation law and Centrelink requirements are being met.
Lump sum withdrawals may be taxable depending upon the age of the recipient and the components of the payment. Lump sum withdrawals are based upon superannuation components using the proportioning rules. These components are split into taxable and tax free percentages and are calculated when an account based pension commences.
Lump sum payments are tax free for those above 60 years of age. There is no requirement to include the payment in your assessable income. Tax may be payable on lump sum withdrawals for people between 55 and 60. The tax free component is not included in assessable income, however, tax may be payable on the taxable component and the whole amount is included in assessable income.
If you are between 55 and 60 it is possible to withdraw a lump sum from your account based pension which includes a taxable component and it can also be exempt from tax. The rules provide that the first $150,000 (indexed) of your taxable component you receive as a lump sum is tax free. Lump sum withdrawals above the cap received prior to age 60 are taxed at 15%.
Case study: Cooper is a 58 year old retiree who would like to receive $50,000 as a lump sum by commuting part of his account based pension. The taxable and tax free component of his account based pension is 75% taxable and 25% tax free.
Cooper will not be liable to pay any tax on the lump sum withdrawal of $50,000. This is because $37,500 ($50,000 x 75%) of the lump sum which represents the taxable component of the lump sum is tax free because he has not withdrawn any lump sums previous and it is within the $150,000 tax free cap that applies.
Generally, Centrelink does not assess a lump sum withdrawal from an account based pension as income. However, any withdrawal of a lump sum will have an effect on the amount of the account based pension that is assessed by Centrelink for income and asset test purposes.
Centrelink assess income from an income stream, such as an account based pension as the gross pension payment less the deductible amount. The deductible amount is calculated as the amount used to commence the pension divided by your life expectancy at the time the pension commenced. Because the deductible amount is required to be recalculated when the account based pension is partially commuted the result may be a greater amount being counted for income test purposes. If this is the case then it may result in a reduction in the amount of age pension being received.
Prior to withdrawing a lump sum from an account based pension it should be ensured that the fund is able to meet the minimum pension requirements under the superannuation legislation. The minimum amount is calculated by multiplying the account balance at commencement or at any subsequent 1 July by a percentage factor set in the legislation. For example, the percentage factor for anyone under age 65 is 2% for the 2009/10 financial year. If the account based pension commences during the year the rules permit a pro-rated minimum to be paid based on the number of days the pension will be paid for that year.
Case Study: Carly, who is 58 year old retiree would like to calculate the minimum pension amount of her account based pension. At 1 July 2009 Carly was 58 and the value of his pension was $260,000. Her minimum payment factor is 2% for 2009/10.
To calculate the minimum annual payment for 2009/10 the account balance as at 1 July is multiplied by the percentage factor. Carly’s minimum pension payment amount for 2009/10 is $5,200 ($260,000 x 2%).
The super rules provide a range of flexible options which allow you to access tax free incomes depending on your age. In addition to receiving an income stream from the pension it is possible to draw a lump sum from the amount supporting the pension and use the rules to your advantage for taxation and Centrelink purposes.
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