Retirement benefits from superannuation should be accessed in the most tax effective manner.
Consider Lyn’s case:
Lyn, who has reached preservation age, is retiring. Lyn requires $80,000 (pre-tax) per annum to maintain her lifestyle. Her current superannuation balance of $1,000,000 comprises 50% taxable component and 50% tax free component.
Lyn may commence a transitional pension up until the age of 60 and withdraw the required $80,000 per annum. The taxable component of $40,000 would be taxed at her marginal tax rates with a 15% tax offset.
Lump Sum Withdrawal
Alternatively, Lyn may elect to withdraw $80,000 per year up until age of 60 as a lump sum. Lyn has a taxable lump sum low rate lifetime limit of $205,000. As 50% of Lyn’s balance is tax free, her taxable lifetime limit would reduce by $40,000 p.a.
The tax effective option for Lyn would be lump sum withdrawal as it is entirely tax free.*
Consideration needs to be given to the taxation of income in the Self Managed Superannuation Fund (SMSF). Previously when commencing a transitional pension in a SMSF the income in the fund was partly or fully tax free, this is no longer the case. Recent rule changes mean income from assets supporting a Transition to Retirement Income Stream (TRIS) in a SMSF still attract the usual rates of tax.
*This is a taxation perspective only, financial advice should be sought prior to accessing superannuation.