When should I start a pension from super?

For most Australians, you’ve spent your working life building up a superannuation savings.

So deciding when to access your super is a big decision, one that has implications for your long-term super balance, your taxable income, and your lifestyle.

Starting a pension from your super can be fraught with misunderstanding. So in this article, we’re going to look at what a super pension is, how to set one up, and the requirements you need to meet before beginning yours.

If you’re thinking about retirement, and how and when to access your super, contact Liston Newton Advisory today to organise a free retirement planning strategy session.

What is a superannuation pension?

A super pension is reasonably simple. It means that you’re starting to withdraw money from your super, and receive regular income from it. Effectively, starting turning it into an income stream.

This is the point at which you convert from the super accumulation stage to the pension stage. It’s when you can start spending your hard-earned superannuation savings.

A super pension isn’t related to a pension from the government. This is your money that you’ve saved, and you’re not relying on the Government to provide you with an Aged Pension.

When can you start a superannuation pension?

The moment you start to draw down on your superannuation as part of a regular income stream is when you officially start your super pension.

But you’ve got to reach your specific preservation age first. Your ‘preservation age’ is the specific age determined by the ATO that you must reach before your super funds are able to be withdrawn. It’s so-called because up until this point, your super is effectively preserved, and you’re usually unable to touch it.

But as well as reaching your preservation age, there are other conditions that you can meet in order to access your super pension. These include:

• You officially retire
• You’re transitioning to retirement
• You’re older than 60 and you finish employment (regardless of whether or not you have a new job)
• You’re 65 years old
• You become permanently incapacitated
• You get diagnosed with a terminal condition.

What is my preservation age?

Your preservation age depends on the year you were born. The current government preservation age brackets are:

• 55 years old if you’re born before 1 July 1960
• 56 years old if you’re born between 1 July 1960 - 30 June 1961
• 57 years old if you’re born between 1 July 1961 - 30 June 1962
• 58 years old if you’re born between 1 July 1962 - 30 June 1963
• 59 years old if you’re born between 1 July 1963 - 30 June 1964
• 60 years old if you’re born from 1 July 1964 onwards

How do I start a superannuation pension?

How you choose to start a superannuation pension all depends on where your superannuation is held. If your super is held in a retail fund or industry fund, you need to contact your fund and request to start a pension.

If you hold your super in an SMSF, you should contact your accountant or Financial Adviser to begin the process.

Starting the super pension itself is a relatively straightforward process—but deciding when to start is the difficult part.

When should I start a superannuation pension?

Starting a super pension is a highly personal decision, so it can differ for everyone. But the most common time to start a super pension is around the time you begin to step back from your career.

To make the transition smoother, many people decide to start a transition to retirement pension (TTR) while they’re still employed. This allows you to scale back your work, and rely on more of the income from your super pension.

You can start this type of pension when you’ve reached your preservation age, but are still working. Be aware, though, that the earnings on funds that support TTR pensions are still taxed at 15%, unlike the funds that support your super pension when you’ve retired. Also, you must start a TTR prior to turning 65—otherwise, it’s full pension territory.

Example

Say you earn $100k per year in your job. You’ve turned 61 and you decide you only want to work two days a week. Now, instead of earning $100k per year, you’re earning $40k a year. You can decide to start a TTR pension and draw down $60k per year from your super to continue supporting your lifestyle.

By implementing a TTR pension and continuing to work part-time, you’re only drawing $60k per year from your super, instead of $100k per year if you were fully retired. Through your employment, you’ll also still be actively contributing to your super at the same time.

A TTR is a good strategy to help your super last longer, while still feeling like you’re starting to enjoy more of a retired lifestyle.

When you stop work completely

There’s going to come a time when you stop working completely, and living off your super savings. For some, this is their working life’s dream come true. For others it’s a necessity.

When you do this, you use your super savings to create an income stream to fund your retirement, under an account-based pension.

Under this form of pension, how often and how much you receive your income is up to you. There aren’t any caps on how much you can regularly receive—but there is a minimum annual amount that you’re required to get, which is worked out by your age. This starts at 4% of your super balance, if you’re 65 years old or under. When you get to 66 this increases to 14%.

Example

You have $1.25 million in your super account. When you reach 61, you decide you want to stop work completely, rather than continue on part-time. So you convert your super into an account-based pension. You’re under 65, so you can access as little as 4%—or as much as you like—of your super annually to provide for your retirement.

This gives you a minimum annual income stream of $50k. You can choose to increase how much you draw down, but this is the minimum you must receive.

How do I decide what to draw down each year?

When deciding how much of your super to draw down, it’s critical to get the advice of a good financial adviser.

There’s a lot to consider. You’re thinking about things like what your super balance currently looks like, how much you want to spend each year, what your super will be invested in. You need to factor in what your taxable income will be.

Your financial advisor can use financial modelling to guide you in making the right decision. They’ll test different scenarios based on how much you spend each year, or what could happen with investment markets over the long term.

When you’re equipped with the right information, you’ll be able to make a confident decision about your pension. You’ll understand the best time to start, how much to draw down each year, and what to invest your super balance in.

The advantages of starting a super pension

• Once you turn 60 and you stop working, or you’re over 65 (working or not), your super—and everything in it—becomes tax-free when your pension starts.
• This means that your super will potentially last longer, and the amount you draw down will be less, in order to live comfortably.

The disadvantages of starting a super pension

• You need to draw down a minimum pension amount every year—even if you don’t need the money.
• Starting your super pension too early means you run the risk of running out of money.
• Starting an account-based pension can impact your Centrelink entitlements, and you may lose some Government benefits.

The final word

When you start a pension from your super is one of the biggest financial decisions you’ll ever have to make. You need to take into account:

• How much you plan to spend
• How long your super will last
• What investments you super should be in
• Your tax situation
• Any Centrelink or Government entitlements that you may need.

Your financial adviser can help you understand all these factors, so you get the best idea of when to start your pension. They’ll be able to use clear financial modelling to give you peace of mind that you’re making the right decision. All you’ll need to do is get in with enjoying your retirement.