By Graeme Colley

So. You’ve done the hard graft, are nearing retirement and eyeing off your superannuation war chest. Once the lock comes off what to do? Take the money as a lump sum, pension or a bit of both?

If you’re a member of an SMSF you can commence an account-based pension or a transition to retirement income stream (TRIS). An account-based pension can commence once you’ve reached your preservation age and ‘retired’ or when you are 65 or older without restriction. Or, if you are working after reaching your preservation age you can start a TRIS. The most important thing is to understand preservation age and the definition of ‘retirement’ under the super rules. 

Preservation age varies between 55 and 60 depending on when you were born. You are treated as being retired once you’ve reached preservation age, have stopped working and don’t intend to resume work for more than 10 hours each week. Once you are 60 or older all you need to do is stop working in one job and you are treated as retired. When you are 65 or older you can drawdown your super no matter whether you’re working or not. 

TRISs can be very handy from a cash flow point of view as they can start once you reach preservation age even though you may continue to work. These days, it means you can receive a TRIS and at the same time may qualify for a tax deduction for super contributions. The benefit is that the taxed part of the TRIS is eligible for a tax offset of 15% and you get a tax deduction for super contributions at your personal tax rate. You must take a minimum TRIS of 4% of the account balance each financial year and no more than 10% of the balance. Do the maths to see whether it’s worthwhile.

Once you’re treated as retired you can start an account-based pension. It requires you to take a minimum amount each year depending on your age, but you can decide when to take it. It could be weekly, monthly or even once each financial year, that’s up to you. Once you are 60 or older the account-based pension is totally tax-free when you receive it. Between preservation age and 60 the taxable component of the account-based pension is taxed at personal rates, but you get a 15% tax offset which reduces your tax bill.

Another benefit of starting an account-based pension: the income the fund earns on investments that support the pension is tax-free, which is a real bonus. But, there’s a catch – there’s a limit of $1.6 million applying to the amount you can transfer into pension phase.

On your passing, you may wish your loved ones to benefit from what’s left over from your super. If you’ve been drawing down a TRIS or an account-based pension, there are two or three options as to how it gets passed on. The first is to make the pension reversionary, second is making a binding death benefit nomination and lastly is relying on your fund’s trust deed.

If you make your TRIS or account-based pension reversionary it means whatever is left over on your death will go automatically to your surviving partner, any of your children or other dependants, whoever you nominate. The alternative is to make a binding death benefit nomination to direct the trustee of the fund to pay the pension to your dependants including your surviving partner or children. If you don’t have either a reversionary pension or a valid binding death benefit nomination, the trustee of your fund can distribute your super as permitted by the fund’s trust deed. It’s important that on your death your superannuation benefit goes to who you intend.

So, paring it all back, what are the basic factors to consider in starting a TRIS or account-based pension? Start with what type of pension suits you, when should it start and what happens to anything that’s left over if you pass away. Then the ultimate question is, how much do you need for retirement. That may mean going back to work so you can afford to retire.