Are you better off accessing your super earlier?

When should you withdraw your super?

It may seem like common sense to leave your savings untouched as long as possible; to think of it as a bank account building up interest. The longer the better, right?

Perhaps not. For many retirees, holding off too long could be a significant mistake. Strange as it might sound, you might be financially better off by drawing on your super today.

How does this work? We spoke with Tim Southerden*, a financial planner at AustralianSuper, about the basic ‘dos and ‘don’ts’ of accessing your super.

“The misconception is that if you start to draw money off your super, people think it will run out sooner,” says Tim.

However, if you access your super as a gradual income stream, or transition to retirement strategy, “the tax savings used to boost your super could result in you retiring on more”.

Investment earnings left in a super account can be taxed up to 15%. However, when the balance is held in a pension account, it will be supplied tax-free. This can make a huge difference for many.

You can begin drawing on your super as soon as you reach preservation age (55, for those of us born before 1 July 1960). This can be anywhere between 4-10% of your super per year, no questions asked.

“Many people don’t really understand the minimums and maximums that they can draw down during a transition to retirement,” says Tim.

Drawing 10% can go toward paying off existing debt, enjoying better lifestyle opportunities, or – if you’re still working, or phasing out of work – compensating for salary sacrifice contributions.

This offers a great deal of flexibility. “You can vary the pension payment – subject to still drawing down the minimum 4% if you’re under 65,” says Tim. “It’s just a matter of deciding what to do with that cash flow.”

If choosing a transition to retirement strategy, one common mistake is to begin too late.

“A lot of people are not aware of the tax benefits of starting a pension account… For example, you might think you have plenty of money for the contributions you need, and you may leave it until you’re 65 and you retire before starting a pension account”.

“When in fact, you may have been better off starting earlier – even at 59, on the first of June – which means you could delay a pension payment to your 60th birthday and it’s all tax-free”.

“Tax is always something you should look at, but usually it’s going to be tax free over 60”.

What if you decided to go back to work?

“You shouldn’t be concerned at all,” says Tim. “Transition to retirement pensions are very flexible. If you decided that you no longer wanted to draw down from the money in your pension account, you could roll it back to a super fund and not draw down on anything”.

“If you’re going back to work, you could consider salary sacrifice contributions. That might reduce the tax that you pay. It’s really a matter of reviewing the opportunities and optimising your savings”.

If you’re already drawing down on your super, it’s important to review your situation every 1-2 years to ensure you’re getting the greatest bang for your buck.

“You need to review the pension payments you’re drawing, you need to review how your pension or remaining super is invested, and also how you’re contributing to super.”

As always, basic financial advice can go a long, long way in making the most of your super – particularly when it comes to how much you should draw down.

Unfortunately, if you’ve passed the age of 65 without drawing on your super, it could be too late to reduce tax. However, an adviser can still help you find ways to optimise your finances.

“A lot of people – especially in metropolitan areas – seem to have a lot of non-super investments,” says Tim. “For instance, they might have shares, or term deposits, or investment properties”.

“Often we’ll find people will not know how to optimise their situation. For example, somebody might have $200,000 in super. They turn 60, and they want to draw some income from their super to pay off some debt, so they might move $100,000 of that super into a pension account”.

“That’s usually not going to be optimal. We might look at moving the maximum amount they can move to the pension account. And it’s a matter of what we do with that cash flow”.

“So it’s a matter of talking through with a qualified financial planner and becoming educated on what the options are – and their implications.”

Are you receiving your super as an income stream? Have you considered it?  

* Tim Southerden is an Authorised Representative of Industry Funds Services Limited ABN 54 007 016 195 AFSL 232514

This article has been sponsored by AustralianSuper Pty Ltd ABN 94 006 457 987, AFSL 233788, The views expressed are those of Starts at Sixty and not necessarily Australian Super. The information is general financial advice and does not consider any specific individuals needs or circumstances. You need to consider your own circumstances to see if it is right for you. For more information, please visit the AustralianSuper website.