Once money is put into super the general rule is that it must stay there until the person entitled to it reaches preservation age.
There are some exceptions to this rule – for example, you might be able to access money before then if permanently incapacitated or suffering severe financial hardship.
The preservation age for a person’s super depends on when they were born. If you were born before 1 July 1960, it is 55. However, it increases incrementally through the next four years to the preservation age of 60 for those born after 30 June 1964.
This makes super often less attractive to younger people, who may be more interested in paying off a mortgage. However, by lowering the deductible contribution limit to a standard $25,000.00 per annum after 1 July 2011 (unless the contributor is over 60 in which case the limit remains at $50,000.00), the Government wants to encourage people to save for superannuation sooner rather than later.
There is now no age at which you have to remove your super – you can keep your entitlements in super funds indefinitely, although this might cause them to be subject to a de facto death duty if, say, the funds revert to adult children. The exception is if someone stops being an Australian resident, then the departing Australian superannuation payment must be paid as a lump sum to them.
The transition to retirement rules allow a person, provided they have reached the preservation age, to take a transition to retirement pension out of a fund before they actually retire.
This rule is particularly attractive to people over 60. They will be able to withdraw tax-free pensions from their fund and use the money withdrawn to make additional tax deductible contributions to the fund (thus getting free tax deductions). However people over 55 and under 60 can still benefit substantially. Whilst they are liable to tax on the pension they gain the advantage pointed out in the next paragraph.
Once the fund goes into pension mode, no tax, including Capital Gains Tax, will be payable on income derived from assets allocated to the pension fund – a magic pudding if ever there was one.
As for paying out a pension, the starting point to consider is not tax, it is whether the rules of the fund allow payment of the sort of pension required – and some, particularly true of older funds, might not. Self Managed Superannuation Fund deeds can be amended to add provisions to take advantage of these rules. Once someone becomes entitled to a pension from a concessionally taxed fund, there is a minimum amount, based on one’s age, that must be taken out each year.
For further information, please contact the Wills and Estates team