Transition super strategy can avoid $3m cap and help your heirs

But it does allow you to withdraw money from your super under a pension arrangement from the age of 59 while you are still working, although withdrawing it from 60 is a smarter strategy because the pension payments will be tax-free.

The super income arrangement available through a transition to retirement pension, Mansell says, allows you to make an annual withdrawal of up to 10 per cent of your superannuation balance. While a transition to retirement pension is an account-based pension, what makes it different is that investment earnings are taxable.

As highlighted in the recent column about using super where you may have a mortgage payment problem, Mansell says that depending on your circumstances it may also be attractive to start a transition to retirement pension, withdraw pension payments and then recontribute those payments as non-concessional (or after-tax) contributions to your own super.

Inheritance benefit

This strategy will allow you to convert taxable super money to tax-free money when super is subsequently paid to an adult child as a death benefit, saving them tax of 17 per cent on any taxable super inheritance they receive from you.

When super is paid as a death benefit, how it is taxed will depend on whether it is classified as taxable or tax-free. It is taxable if it is sourced from income before you paid tax on it – such as super contributions an employer made for you or money you salary-sacrificed into super, or any contributions on which you were allowed to claim a tax deduction.

Tax-free super is generally from non-concessional (or after-tax) contributions, including personal contributions you made from your after-tax income.

Equalise partner’s super

Recontributing super withdrawn as a pension as after-tax contributions into your spouse’s name could also be attractive if you are ultimately likely to exceed your transfer balance cap (your limit on superannuation savings that can be transferred into the tax-free retirement phase) but your spouse has some transfer balance cap “space” available.

This could allow couples to make best use of both their transfer balance caps, which would mean an SMSF gets as big a tax exemption as possible on its investment income.

Or it could also be useful where a pension member is ultimately likely to have more than $3 million in super when the new tax on such amounts is introduced.

Pension payments and contributions, Mansell says, could effectively shift super from one member of a couple to the other and reduce the tax payable by the pension member.

What happens later?

Things to be aware of when considering a transition to retirement pension, Mansell says, is that when you reach 65, or earlier if you happen to retire before then, your pension will become a retirement phase pension and be counted against the general transfer balance cap that applies when this takes place. Investment income will also be tax-free.

Also useful to know is that the earliest age when someone can start a transition to retirement income stream is 59. Those older can start one as long as they’re younger than 65.

This earliest age rises to 60 in 2024-25 when anyone born after June 30, 1964, can start a tax-free transition income stream with its income withdrawal entitlement of 10 per cent of their account balance. This would move into a retirement phase pension in five years, when there would be no restriction on payment amounts.

When it does, the account balance will be assessed against their transfer balance cap and not how much they started their transition pension with.

While contributions to super can be accepted until age 75 – and some contributions such as super guarantee and downsizer contributions can be accepted beyond that age – there are limits to how much super can be contributed based on how much you have accumulated.

For the purposes of your contribution caps, contributions made to your transition to retirement pension – even when it moves to retirement phase when you reach 65 or earlier if you retire before then – are treated in the same way as any money you have in an accumulation account. Tax is paid on any investment earnings. How much you can contribute will depend on your total super balance, which will include any money in your income stream.

If you’re under 65 and have a transition pension, you can make $27,500 in pre-tax (or tax-concessional) contributions. After-tax (or non-concessional) contributions of $110,000 a year can be made so long as you have less than $1.7 million in total super on June 30 of the previous financial year. Where you have less than $1.48 million in total super, you can contribute three times $110,000 – or $330,000 – to your super.