How to shift into pension mode

If our working years are the time we focus on building up our superannuation savings, then our retirement years are when we aim to make use of them.

At least, that’s the goal for most Australians. This naturally leads to the question: How do I start accessing my super when I stop working — or even before I retire?

This article covers the basics, including general eligibility rules for accessing your super and how to transition from a super accumulation account to an account-based pension.

What age can I access my super?

To legally access your super, you generally need to meet a condition of release after turning 60 years old.

This can be done by either retiring completely or by continuing to work and starting a Transition to Retirement Income Stream (TRIS). The TRIS option allows you to reduce your working hours while using pension payments to supplement your part-time income.

Once eligible, you can choose to:

• Start a pension income stream
• Make a lump sum withdrawal
• Or opt for a combination of both

How do I start a pension account?

To legally access your super, you’ll generally need to roll some or all of it from your accumulation account into a newly created pension account.

If you’re starting a Transition to Retirement Income Stream (TRIS), you’ll continue receiving compulsory Super Guarantee contributions from your employer into your accumulation account. These contributions are taxed at the standard rate of 15%, and investment earnings in your pension account during the pre-retirement phase are also taxed at 15%.

Most super funds offer pension account products with a range of investment options, similar to those available in accumulation accounts. If you have a self-managed super fund (SMSF), it’s important to speak with our expert financial advisers to help facilitate the rollover and pension account setup.

To begin the process, you may need to contact your super fund. Typically, this involves lodging a request by completing a form and specifying how much of your super you wish to roll over and where it should be allocated.

Once your funds are in a pension account, you can choose to withdraw a lump sum, start a regular income stream, or use a combination of both. The Australian Taxation Office (ATO) mandates minimum annual withdrawal amounts, which vary depending on your age.

There is also a cap on the amount that can be transferred from super to a pension account as a tax-free retirement income stream, known as the transfer balance cap. This cap is currently set at $2 million. The ATO tracks how much you transfer, and if you exceed the cap, you may be subject to an excess transfer balance tax.

If your super balance exceeds $2 million, you have two options: keep the excess in your accumulation account and pay up to 15% tax on earnings or withdraw the excess as a lump sum.

What are the tax considerations in pension mode?

If you’re aged 60 or over and fully retired, any income earned on your pension assets is tax free and so are the pension payments you withdraw.

Also, a major advantage is that the profits from any investments sold within a pension account are completely capital gains tax free.

What are the minimum pension withdrawal amounts?

Once you’ve rolled over some or all of your super into an account-based pension, you are legally required to withdraw a minimum pension amount each financial year. This amount is calculated as a percentage of your account balance and is based on your age.

For new pensions, the minimum withdrawal is calculated on a pro-rata basis, starting from the date the pension commences to the end of the financial year.

If you’re under 65 and accessing your super through a Transition to Retirement Income Stream (TRIS) without having met a full condition of release, there are limits on how much you can withdraw tax-free. The minimum withdrawal is 4% of your super balance, and the maximum is 10% per financial year.

Any amounts leftover in your pension account when you die will go to your nominated beneficiaries. Depending on the type of beneficiary (reversionary, spouse, dependant or non-dependant), the amounts can be paid as an ongoing pension stream until the account runs out or as a lump sum.

Consider professional advice

If you’re seeking total financial flexibility in retirement, you might consider a combination approach: leaving part of your money in super, rolling some into an account-based pension, and withdrawing lump sums as needed.

This strategy offers a range of benefits, including access to regular income, continued investment growth, and the ability to respond to unexpected expenses. However, it’s important to be aware of potential tax implications—both for you and your beneficiaries.

Managing a mix of a super accumulation account, an account-based pension, potential Age Pension entitlements, investment income outside of super, and irregular lump sum withdrawals can be complex.

That’s why engaging with our financial advisers is a worthwhile step as you and your loved ones weigh up retirement options. Our team can help you navigate the rules, optimise your strategy, and work with you to make sure your financial decisions align with your lifestyle goals.