Introduction to retirement

Retiring is a major milestone in a working person's life. While many people can't wait to hang up their working boots or suits for good, others prefer to ease themselves into retirement while still being active in the workforce.

The good news is that people approaching typical retirement ages have a range of choices:

  • Access your super benefits tax-free as a lump sum or pension when you retire from age 60 or turn 65.
  • Convert all or part of your super into a transition to retirement income stream if you are between 55 and 65 and continue to work in a full or part-time capacity.
  • Leave your retirement benefit in your super fund indefinitely.
  • Continue working and contributing to your super up to the age of 75.

Accessing your super tax-free

You can now access your super benefit tax-free at the age of 60, whether you take it as a lump sum or pension.

If you want to access your super as a lump sum or commutable retirement income stream you will need to be retired and of preservation age. A commutable income stream gives you the flexibility to convert your income stream into a lump sum if you need to.

Your preservation age depends on your date of birth.

Your date of birthYour preservation age
Before July 1960
55
July 1960 to June 1961
56
July 1961 to June 1962
57
July 1962 to June 1963
58
July 1963 to June 1964
59
After June 1964
60


Among the benefits of rolling your super into a pension product is that you don't pay any tax on your investment earnings or capital gains and your regular pension payments aren't subject to income tax from age 60.

Transitioning to retirement

From age 55, you can ease yourself into retirement with a transition-to-retirement pension while continuing to work on a part or full-time basis. Minimum and maximum limits apply on annual pension payments.

For various reasons, many super members receiving a transition-to-retirement pension decide to leave a proportion of their super savings in the accumulation phase.

Leaving your benefits in super

If you don't want to access your super immediately, you may be able to leave it in your fund indefinitely. Your investment earnings will continue to be taxed at a maximum of 15 per cent and you may also pay capital gains tax until you roll your super into an income stream product.

You can withdraw income payments tax-free from your super fund as you need them.

Continuing working and contributing to super

You can continue contributing to super up to the age of 75 provided you meet certain work test conditions. This means you must have been gainfully employed for at least 40 hours within a period of 30 consecutive days during the financial year in which the contribution was made.

How long will my retirement income last?

Thanks to current life expectancies and medical advances, Australians who retire at 65 can expect to spend at least 20 years in retirement - that's around a quarter of your life.

To a large extent the amount of money you need to fund your retirement depends on your lifestyle expectations. Retirement experts suggest you should aim for around 65 to 70 per cent of your pre-retirement income to maintain your current living standards.

Just because you give up work doesn't mean your super should. How you invest your super benefit when you retire can make a big difference to your lifestyle choices in retirement.

Issues to consider:

  • Investing for the long-haul: remember your retirement benefit may need to last around twenty years so make sure you invest yours wisely. Including some growth assets may help your retirement savings keep ahead of inflation and last the distance.
  • Tax: think carefully about how you access your super benefit as tax may make a big difference to how long your retirement income lasts. Remember, if you take your benefit as a lump sum and invest it outside the superannuation environment you may be subject to income tax on your investment earnings. Rolling your benefit into a retirement income product offers substantial tax benefits.
  • Social security: you may be able to supplement your retirement benefit with the Aged Pension if eligible. You will need to pass the income and assets tests to qualify.
  • Accessibility: be realistic about how much money you will need to live off. Don't forget to factor in any holidays or major purchases you are planning to make. On the income side, take into account any investments you hold outside superannuation as well as any social security payments you may be entitled to.
  • Balancing risk and return: make sure you understand your attitude to risk and choose your investment strategy accordingly. Spreading your money across a range of investments is one of the best ways to reduce your exposure to market risk. With a diversified portfolio of investments, returns from better performing investments may help offset those that underperform.
  • Get advice: Taxation and social security rules can be complex, so you may want to speak to a financial adviser about the best way to structure your superannuation and other assets for your individual needs and circumstances.

Retirement income streams

There are number of ways you can access your super when you retire.

Keeping your super invested while drawing a regular income

The beauty of rolling your superannuation into a pension product is that your super fund doesn’t pay any tax on its investment earnings or capital gains tax and your regular pensions payments aren't subject to income tax.

Retirees receiving pensions who are under 60 may find their pensions taxable at their marginal tax rate less a 15 percent tax rebate. There is no tax on pension payments for those over 60 who have satisfied a condition of release.

Retirement income options are usually divided into account and non-account based pensions. People over 55 who want to continue working while drawing an income from their super can use transition to retirement income streams.

Account based pensions (previously known as allocated pensions)

Account-based pensions give you control and flexibility over how you access your retirement income. They pay regular income payments to cover your day-to-day living expenses while giving you the flexibility to make larger withdrawals when you need them. Payments are generally made until your balance has been exhausted.

Investing your superannuation in an account-based pension keeps your benefit in the super environment, so you pay no tax on investment income including realised capital gains. Also, if you are over age 60 your income payments will be tax free if you have satisfied a condition of release. You may also qualify for additional Aged Pension entitlements and pay less tax on your investments outside superannuation.

How account-based pensions work

  • You (or your dependants) receive regular income or lump sum payments until your capital runs out.
  • Minimum annual payment amounts apply and range from 4 per cent for people under 65 to 14 per cent for the over ninety-fivers.
  • No maximum pension requirements apply.
  • Your pension or lump sum can be transferred to a dependant or your estate when you die.

    Non-account based pensions and annuities include lifetime, fixed term and life expectancy pensions and annuities. They pay a regular, guaranteed income over a set period of time, life expectancy or lifetime. These types of income streams are usually non-commutable, which means they can't be converted into a lump sum at a later date. While these income streams offer a guaranteed level of income, they tend to have less flexibility and offer lower long-term yields than market-linked products. Non-account based pensions are available through superannuation fund providers while annuities are sold through life insurance companies.

    Transition to retirement incomes streams

    Under the Government's transition to retirement rules you can ease yourself into retirement between the ages of 55 and 60 depending on your preservation age without sacrificing your income. These rules allow people to continue working full or part time while supplementing their income with an income stream from their super savings.

    To benefit from the transition to retirement rules you will need to rollover all or part of your super benefit into a non-commutable income stream. This means your income stream cannot be converted into a lump sum payment until you retire permanently, reach 65 or satisfy another condition.

    You will need a sufficient super balance to cover pension payments. You can vary your income payments within government limits. The minimum starts at 4% each year of your account balance if aged between 55 to 64 and increases with age. You can only take up to 10% of your super account balance every year.

    If you're over 60 your income payments will be completely tax-free. If you're under 60 your income payments may contain a tax-free component. The taxable component is taxed at your marginal tax rate and a 15% rebate may apply.

    You can still continue contributing to super while you are working up to the age of 75 providing you meet certain work test conditions. This means you may be able to sacrifice some of your salary into super and pay less tax on your salary, while receiving a tax-free income from your pension.

Taxation and social security issues

The amount of tax you pay on your super benefit depends on your age and how you access your benefit. The tax rules can be complex, so it may be worthwhile speaking to a professional tax or financial adviser.

Here is a brief overview of how retirement income options are taxed.

Income payments and investment earnings

Keeping your benefit within the super environment once you retire has its benefits. If you roll your benefit into a superannuation pension, you pay no tax on investment earnings (which includes any realised capital gains). You will also pay no tax on your income payments if you're over 60 or have satisfied a condition of release.

If you have reached your preservation age and are under 60, the income from your pension may be taxed at your marginal tax rate. A 15% tax rebate may apply.

Transition to retirement income streams

If you have reached your preservation age you may be able to benefit from the transition to retirement rules and rollover your benefit into a non-commutable income stream while continuing to work.

If you're over 60 your income payments will be completely tax-free. If you're under 60 your income payments may contain a tax-free component. The taxable component is taxed at your marginal tax rate and a 15% rebate may apply.

Lump sum payments

You can take your super as a lump sum at 60 tax-free (if you have satisfied a condition of release). If you decide to invest your benefit outside super, any investment income you earn will be taxed at your marginal tax rate.

Leaving your benefit in your super fund

You can now leave your benefit in your super fund indefinitely. You can drawdown your super once you reach 60 or have satisfied a condition of release. You will pay tax on your investment earnings to a maximum of 15% and may also pay capital gains tax - although there is no income tax on withdrawals.

Contributions

You can continue contributing to super while you are working up to the age of 75 providing you meet certain work test conditions. This means you must be gainfully employed for at least 40 hours over a 30 consecutive day period during the financial year in which you made the contribution.

Contributions made from your before-tax salary (salary sacrifice) will be taxed at 15%. Any contributions you make from your after-tax salary are not taxed. Your investment earnings will continue to be taxed up to 15%.

Social security issues

Retirement income streams are subject to means testing for social security purposes.

As your retirement income payments include some of your capital, special rules apply to income testing. Generally, only the income component of your payment is counted towards the income test.

All income streams, except defined benefit types, are counted towards the assets test. Non-commutable income streams (ie those you cannot convert into a lump sum) receive a part exemption from the assets test.

Social security rules can be complex so it may be worthwhile seeking advice from a professional tax or financial adviser. The Department of Families, Community Services and Indigenous Affairs publishes a brochure on retirement income streams. You can access this at the FaHCSIA website.