Accessing your super: when and how to do it

There are several ways to access your super. Gayle Bryant explores the options and which might work best for you.

While some of us have no intention of fully retiring any time soon – if ever – there will come a time when you’re able to access your superannuation savings. And since you can do that in a number of ways, it’s worth knowing your options so you’re prepared when the time comes.

When can you access your super?

Most commonly, you can access your super when you have reached any of the following two options:

• your 'preservation age' and retired
• the age of 65 (even if you’re still working).

Your preservation age is the minimum age you need to reach in order to access your super. It can be from 55 to 60 years of age, depending on what year you were born.

TABLE 1

Source: ATO

How can you access your super?

There are three basic ways you can access your super. You can take it as:

• a retirement income stream
• a lump sum
• a combination of both.

There are pros and cons to each option, depending on your circumstances.

Option one: Retirement income stream

Accessing your super in the form of a retirement income stream is also known as drawing a superannuation pension.

This option can help make your money last longer in retirement, as regular small payments are drawn down while the rest of your money remains invested in the market.

It can also help you to manage and budget your retirement income. Once you’re retired, your need for a regular income doesn’t stop. There are still bills to pay and everyday life to enjoy, so having regular income payments can help you to manage your household budget and other spending with more accuracy.

There may be some great tax advantages to this option, too. First, investment earnings inside this type of pension are not taxed. To secure this tax exemption you must withdraw a minimum amount (as a percentage of your account balance) each financial year, depending on your age and account balance.

Minimum annual pension withdrawal payments

TABLE 2

Source: ATO

Second, the retirement income (or super pension) payments made to people aged 60 or over are generally tax free. But, if you’re between your preservation age (of 55 years or more) and 60 years old, the taxable component of payments will be taxed at your marginal tax rate, less a 15 per cent tax offset.

You need to also consider the transfer balance cap of $1.7 million effective from July 1, 2021. The cap is placed on the amount of money that could be transferred to a retirement account with tax-free investment earnings.

Option two: Lump sum payment

You also have the option of taking your super as either a single lump sum or several large withdrawals spread over time.

While this may seem an attractive option that would allow you to pay off any outstanding debts – such as your mortgage – there are some implications to consider, the first of which is tax.

If you choose this option, withdrawn money is no longer considered to be super money, so if you invest it, any earnings gained outside your super account will be taxed at your marginal tax rate.

Leaving money in super also has ramifications. The underlying investments can be affected by market downturns and fluctuations that are more volatile than you’re comfortable with and in some cases you may find yourself with negative returns.

Some super investors may leave their money in super because their fund offers a “guaranteed” return. However, often these returns come from very safe assets such as cash and may not give you the growth you require over time.

If you’re aged 60 or more, you can withdraw your super tax free. If you’re younger, you may need to pay tax. If you’re between your preservation age and under 60, you can withdraw the taxable component up to the low rate threshold of $230,000 (2022-2023) tax-free. This is a lifetime threshold indexed annually. Any amount of taxable component you withdraw over this low-rate cap is generally taxed at 17 per cent including the Medicare Levy. If you’re below preservation age the taxable component withdrawn is generally taxed at 22 per cent including the Medicare Levy.

If you’re thinking about this option, you also need to consider what you’ll live on if there’s nothing left in your super account and you have no other income-generating assets. While the age pension is an option, it’s unlikely to provide you with a comfortable lifestyle.

Option three: A combination of both

A third option would be to draw down a lump sum that is just enough to pay off your debts, and then start a retirement pension with the remainder. You can withdraw more than one lump sum but if you intend to make regular withdrawals then it is usually better to set up a retirement income stream. This way you can keep a proportion of your super money in a tax-effective environment and draw down a regular income.

So which option should you choose?

The best option for you will depend on your circumstances.

For example, a superannuation pension generally suits those who have fully retired and have the flexibility to draw down at least the minimum amounts.

However, if you need a lump sum to pay off your debts, then drawing it out of your super could be an option, especially if you have other assets outside super that you can use to fund your lifestyle.

If you’re nearing the time when you’ll be able to access your retirement income, start discussing these options with your financial adviser or accountant now, so you can make an informed choice based on a comprehensive understanding of the pros and cons of each.

What are the pros and cons of each option?

Option: Lump sum

Pros

Usually received tax free if over 60 and can use to pay off debts such as mortgage, invest elsewhere or make large purchases, such as a car or holiday.

Cons

Could run out of money. Earnings on any investments outside super are taxed at your marginal rate.

Option: Retirement income stream

Pros

Receive regular income, which helps with budgeting. Payments are tax free if you’re over 60. Investment earnings are generally tax free.

Cons

The maximum amount you can transfer into an income stream is $1.7 million – the ‘transfer balance cap’.

Option: Lump sum and retirement income stream

Pros

Can use lump sum for large purchases while drawing an income stream from remaining funds.

Cons

Need to monitor lump sum withdrawal amounts to ensure retirement income stream still provides enough to live on.

All case studies are hypothetical and are not meant to illustrate the circumstances of any particular individual. Taxation law is complex and this information is our interpretation of the law. It has been prepared as a guide only and does not represent tax advice. You should seek independent tax advice specific to your individual circumstances from a tax adviser or registered tax agent. Superannuation is a long term investment and the rules and regulations governing it are subject to change. ANZ recommends that you keep informed of the changes to superannuation and any potential impact any changes may have.