Superannuation

Reader’s question: I’m 55 and was recently made redundant. I rate my chances of obtaining full-time employment as slim. I have a reasonable superannuation account balance but not enough to make me financially independent.

To supplement my super I will need to access as much social security assistance as I can. I understand that if I start a pension from my super no income tax is payable in the fund. I also understand that lump sum withdrawals for anyone under age pension age aren’t assessable under the Centrelink income or assets test.

Is it possible to start a pension in my super fund so as to pay no tax in the fund but elect to have the pension payments treated as lump sums so as not reduce any social security entitlement before I turn 65?

Given your question is driven by a wish to explore an entitlement to a social security benefit prior to the government age pension, it is recommended that you speak to a Centrelink officer who will be able to explain any social security benefits you may be entitled to receive, says Kate Anderson, a technical adviser with SuperIQ.

Newstart allowance

For example, you may be eligible for a Newstart allowance, which is a benefit paid to someone under age pension age who is looking for – or willing to – look for paid work.

As someone who is 55 you are able to access your super as you have reached the preservation age that applies to someone your age. This means you can withdraw benefits from your super. If you begin a pension you are correct in stating there will be no tax on the investment earnings as they accumulate in your pension.

One thing you should be aware of, says Emma Boer of Dixon Advisory, is that if you apply for Newstart, you are intending on work again and may therefore not be entitled to access your superannuation via a lump sum.

Assets test

Centrelink will assess the income you withdraw from a pension to determine your entitlement to any social security benefits.

Your pension account balance will also be included as an asset for the purpose of the assets test. This balance is revalued every six months, unless you only receive your pension annually in which case your account balance is also revalued annually.

Your annual pension (less a “special” deductible amount) is counted as income. This deductible amount differs from that used for tax purposes. In the case of an account-based pension it is the full purchase price or total value of the pension account divided by a life expectancy factor.

Lump sum

If you have declared that you are no longer gainfully employed and have no intention of working for at least 10 hours a week in the future, you are permitted to make lump withdrawals from your pension and, before taking a lump sum amount, make an election to your fund to treat this as a capital payment and not a normal pension amount.

The implications of making this election are that the withdrawal will not count towards the minimum drawdown requirements.

In addition, for Centrelink purposes, the lump sum will be treated as a return of capital and not assessed as income. Where an election is not made, the lump sum is assumed to be assessed towards pension income.

If you decide not to start a pension from your super but instead take lump withdrawals from your accumulated superannuation benefits, it will not be income or assets-tested by Centrelink until you reach age pension age. However, the means test may apply where the funds are subsequently invested.