As you think about retirement, one of the biggest questions on your mind is likely whether your savings will be enough to see you through your golden years so you can enjoy what matters most in life.
The government has put in place a concessional superannuation tax system designed to help you make the most of your retirement savings. A critical component of this system is the option to transfer your superannuation benefits into what’s known as the ‘Retirement phase’ – previously known as the ‘Pension phase.’
In this article, we’ll help you understand what this is and how you can take advantage in order to boost your savings.
First, let’s understand the two superannuation phases
Superannuation is generally divided into two main phases: the Accumulation phase and the Retirement phase.
- Accumulation Phase: During this phase, your super is actively growing, with contributions from your employer, and potentially personal contributions, adding to the balance. Earnings on your super investments during this phase are taxed at 15%.
- Retirement Phase: Once you’ve met a condition of release (such as reaching age 65), you can transition your super into the Retirement phase. Here, the earnings on your investments become tax-free, which is a significant benefit. But keep in mind that you’ll be required to withdraw a minimum amount from your account each year.
How Much Can You Have in ‘Retirement Phase’?
This is where the transfer balance cap comes into play. To ensure that only a reasonable amount of super can enjoy tax-free earnings, the government introduced the transfer balance cap in July 2017. This cap limits how much you can move into the Retirement phase. Initially set at $1.6 million, the cap has been adjusted for inflation and now stands at $1.9 million.
For those who had already started a pension account before
the cap was indexed, their transfer balance cap will be somewhere between $1.6 million and $1.9 million, depending on when their account was established.
What Happens If You Exceed the Cap?
Your super fund is required to report any transfers into or
out of the Retirement phase to the Australian Tax Office (ATO). If you exceed
the transfer balance cap, the ATO will issue an excess transfer balance
determination. This means you’ll need to move the excess amount back into
the Accumulation phase, where earnings will be taxed at 15% or 30%, depending on whether it’s your first time exceeding the cap.
How to Set Up a Pension Account?
If you’re considering transitioning your super into the Retirement phase, start by checking if your super fund offers Retirement phase accounts. Most funds provide options, but it’s essential to ensure they meet your needs. Then you can simply proceed by completing the necessary paperwork to establish an account.
And of course, if you have any questions or need some extra guidance
through the process, our team is always here to help. We can assist you in
understanding the requirements and ensure all the necessary documentation is completed to establish the pension correctly.
Have a question or comment?
If you have any questions or comments relating to this article (or any other accounting matter) please get in touch with us at [email protected] and we’ll be happy to assist you.
