A Member of a Superannuation Fund no longer needs to stop working to access his or her superannuation savings. The law allows a Member to access their super while they are still working as long as he or she has reached the Preservation Age which is 55, for anyone born before 1 July 1960, and gradually increases to 60 for anyone born after 30 June 1964.
If a Member has reached his or her Preservation Age, he or she may commence a Transition to Retirement (“TTR”) pension from his or her Self-Managed Superannuation Fund (“SMSF”). The minimum amount of pension that he or she may access is based on his or her age at 1 July or at the commencement of the pension, and a percentage of his or her pension account balance. This starts at 4% for people aged under 65 and gradually increases to 14% for ages 95 or older. If your pension commences during the year, the minimum amount is based on a pro-rata calculation from the commencement date. The maximum amount of TTR pension a Member may receive is 10% of his or her pension’s account balance. The pension must be paid as a non-commutable income stream, which means a Member cannot convert it to a lump sum until the Member meets a condition of release such as turning 65.
A Member may also continue making contributions into his or her SMSF, once the Member has commenced a TTR pension. A Member may also contribute his or her salary into the SMSF and replace it with a TTR pension. By doing this, the SMSF will pay 15% tax on the sacrificed salary instead of the Member paying tax at his or her marginal tax rate. It is necessary to consider the concessional contributions cap of $30,000 per annum, or if a Member is 49 years of age or over on 30 June 2014, the cap of $35,000 per annum.
A Member may receive a TTR pension and recontribute it back into his or her SMSF as non-concessional contributions. This increases the tax-free portion of the Member’s superannuation savings. A Member needs to consider his or her non-concessional contributions cap of $180,000 per annum or, if the Member is under 65 at any time in the first year, such a Member may make a contribution in excess of the annual limit, the cap of $540,000 in one year or over 3 consecutive financial years. If a Member does recontribute the pension back into his or her SMSF and is aged 65 to 75, then such Member needs to satisfy the work test. This involves having worked 40 hours in 30 consecutive days in a financial year.
Are there tax advantages?
The tax advantages of assessing a TTR pension from the Member’s SMSF is that the investment earnings from the SMSF’s assets supporting the pension are tax-free. On top of that, if the Member is 60 or older, such Member’s pension is also tax-free in his or her hands. If the Member is aged between 55 to 59, the taxable component of the pension is taxed at the marginal tax rate with a 15% tax offset.
A member may stop his or her TTR pension at any time and revert his or her SMSF back into an accumulation phase. Before doing anything, a Member should ensure that his or her SMSF’s Trust Deed allows for a TTR pension.
For more information or advice concerning Superannuation, contact the experienced team at Rockliffs Lawyers today.