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.

Account based-annuities

These products operate in a similar way to account-based pensions but are purchased from life insurance companies.

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 per cent each year of your account balance if aged between 55 to 64 and increases with age. You can only take up to 10 per cent 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 per cent 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.

Before commencing a retirement income stream there are a few things you should consider:

• You need to have reached your preservation age, which is between 55 and 60 depending on your date of birth, before you can commence a Transition to Retirement Pension.
• With both transition to retirement and Account Based Pensions, you can only draw down income within minimum and maximum limits prescribed by the government.
• You cannot make lump sum withdrawals from a Transition to Retirement Pension until your retirement
  or reaching age 65.
• You need to meet a condition of release in order for you to be able to invest in an account based pension.