But before we begin, we need to learn two definitions – preservation age and condition of release.
What is ‘preservation age’?
Since superannuation was designed to encourage saving for retirement, your money in super is preserved (inaccessible) within the superannuation system until you reach the age that the government has deemed it accessible. That age is referred to as preservation age.
Preservation age is 60 for those born after July 1, 1964, and it will be 60 for everyone else from July 1, 2024, when the legislated changes from 1998 to increase preservation age from 55 to 60 are fully rolled out.
What is a ‘condition of release’?
Reaching preservation age enables you to have met a condition of release to access your super, there are still restrictions to meet a full condition of release.
The three possible full conditions of release for the purposes of retirement are:
● reaching ‘preservation age’ and having retired;
● ceasing a gainful employment arrangement on or after the age of 60; or
● reaching 65 years of age, regardless of employment.
There is also a partial condition of release where you have reached preservation age but have not met a full condition of release as above. This allows you to access up to a maximum of 10% of your super per year (using a TTR pension as explained below).
There are also non-retirement conditions of release, such as terminal illness, temporary or permanent incapacitation, and financial hardship.
Superannuation account types
There are 3 superannuation account types:
The word ‘pension’ means an income stream (i.e., periodic payments) to support retirement.
Before preservation age, you will only be allowed an accumulation account, so if you are under 60 or have never converted your super to a pension account, this is the type of account you have.
An accumulation account is taxed at 15% on income and short-term capital gains (less than 12 months), and 10% for long term capital gains. Even at age 60 and older, investment earnings within an accumulation account continue to be taxed at these rates. It is only when you meet a condition of release and you elect to move to an account-based pension (the next type of account we will discuss) that you cease paying tax on your earnings within your super.
Besides tax within the fund the other way tax could be paid is on withdrawals in your personal tax, but after age 60, there is no tax to pay on withdrawals, and this is regardless of account type.
You cannot draw from an accumulation account until you have met a condition of release (for example, retirement after preservation age, ceasing a gainful employment arrangement after age 60, or reaching age 65).
You can continue to add both concessional contributions (CCs) and non-concessional contributions (NCCs) while your total super balance is under the Transfer Balance Cap (TBC), which is currently $1.9 million. Once you have reached the TBC, you can no longer add NCCs. You can only add CCs.
There are also age restrictions:
- after age 75, you can only add to super through mandated employer contributions
- after age 67, you can only add CCs if you meet the work test.
The word pension simply means an income stream, typically for the purpose of retirement. There are many types of pensions, including the age pension (from the government), account-based pension (from your super), and defined benefit pensions (from an employer).
An account-based pension is a regular income stream bought with money from your super when you retire. However, it is not guaranteed income for life. The income stream is from money coming out of your account (hence the name ‘account-based’), so it can run out.
With an account-based pension, there is:
- zero tax on investment earnings (both income and capital gains)
- zero tax on the income you receive (if you are over 60), and
- zero tax on lump sum withdrawals.
With an account-based pension, there is zero tax to pay for decades of retirement.
This is why the main strategy for people approaching 60 is to pump as much money into super as possible.
How much can you put into an account-based pension
The Transfer Balance Cap (TBC) is a lifetime limit on the amount you can transfer into an account-based pension.
You can move up to the $1.9 million Transfer Balance Cap of your accumulation account balance into an account-based pension once you have met a condition of release (e.g., retirement after preservation age, ceasing a gainful employment arrangement after age 60, or reaching age 65).
Once you have met a condition of release, you can choose how much you transfer in from an accumulation account up to the TBC. Anything over that must remain in an accumulation account (or can be withdrawn from super).
How to add money to an account-based pension
You can not contribute directly to a pension account. Contributions can only be made to an accumulation account, which you can hold in addition to a pension account. To add funds to an account-based pension, you either need to create an additional pension account or move your existing pension back to an accumulation account and combine it with any new money in the accumulation account and move that into a new pension account. The latter option is more common since it is simpler with one account and you save on account fees.
Just as with an accumulation account, you get to decide how it is invested through your super fund.
Access and minimum withdrawals
There is a minimum amount that you must draw out of an account-based pension each year, which is age-based, and starts at 4% for those under 65 years of age and increases with age. If that is beyond what you need, you may be able to contribute it back in (depending on age and cap eligibility) or else you can invest it outside super, however, it will be in a taxable environment.
There is no maximum withdrawal – you can take as much as you want, but anything invested outside super will lose the zero-tax-rate environment.
Interaction with the age pension
The total value of your account-based pension (not the specific amount withdrawn) forms part of the income and assets test for the age pension.
Transition to retirement (TTR)
If you have reached your preservation age and are under 65 and still working (i.e., you have not met a full condition of release), you can transfer some or all of your accumulation account to a TTR pension account. If you have met a full condition of release, an account-based pension is a better option over a TTR pension because a TTR pension account is still taxed on earnings.
A TTR account is a pension account that allows you to start receiving an income stream from your super while you are still working, so it can supplement your income from your super, for instance, if you wanted to reduce your work hours. For example, you may reduce your work to a 4-day-week and draw the difference in take-home pay from your TTR account.
Being a pension product, you cannot contribute to a TTR account directly. But you can continue to contribute to your accumulation account while you are eligible to do so and move that into a new TTR account.
Being a pension product, you must draw down the minimum each year, the same as an account-based pension, but unlike an account-based pension, there is a maximum you can drawdown, which is 10% of the TTR account balance per year.
Before 2017, a TTR pension account was not taxed, but starting from then, it is taxed as an accumulation account, so there is no tax-benefit on earnings like with an account-based pension.
However, there is an interesting advantage where you can salary sacrifice into super to pay less tax on your income, and at the same time draw money from your TTR account in super to live on, which is tax-free to withdraw if you are over 60. This is known as an ‘income swap’ strategy.
You can also begin the ‘recontribution strategy‘ using a TTR, which we will explain in a later article.
With a TTR, you could also access some of your super to pay off debt, such as your mortgage to free up more of your income, or for an upcoming expense. Although if your earnings in super are higher than the mortgage interest rate after accounting for tax, it might be better not to pay it off. Also, you will be reducing your super balance, so take that into consideration too.
You now know the three superannuation account types – accumulation, account-based pension, and TTR.
For most people, it is beneficial to move to an account-based pension as soon as possible due to the tax savings on your investment earnings.
If you’re expected earnings on your accumulation account is 8% p.a. and you are taxed between 10 and 15% on earnings (let’s call it 12.5% for simplicity), then you are paying about 1% p.a. in tax (on your total balance). By moving to an account-based pension, you are able to avoid that 1% p.a., which for $500,000 is a savings of $5,000 per year, and for $1 million is a savings of $10,000 every year.
However, be aware that there is also a minimum required withdrawal from an account-based pension, and if you have reached the TBC and can no longer recontribute anything you don’t need, and if your taxable income outside super is over the tax-free threshold, moving to an account-based pension may result in more tax.
A quick note – a small part of the population has access to untaxed super funds or defined benefit super funds. If this is you, you need to spend some time learning about the nuances of those super funds and the account types as they differ from ordinary super funds in significant ways. You can contact your super fund to help you understand it. Alternatively, you could speak to an adviser who specialises in these, either from your super fund, or privately.