Preservation age is defined as the age you must reach to access superannuation, but it’s not always that simple, says chartered accountant GAIL FREEMAN.

Viraj and Annie came to see me about their retirement arrangements.

“I’m about to retire in a couple of weeks and I’m puzzled about my PSS pension and some of the terms,” he said. “I went to see an adviser, but I am still confused.

“I understood that preservation age was when I could draw my pension, so I believed I could retire at 60, but due to some PSS rules I was able to retire earlier provided I drew a full pension and didn’t take a lump sum. “Annie turned 60, but she doesn’t seem eligible to draw a pension, we would like to understand the rules that apply to her, too.”

I told Viraj preservation age was 60 and after June 30 2025 everyone would retire after their preservation age of 60.

“Preservation age is simply defined as the age you must reach to access your super,” I said.

“In your case you resigned before you reached 60. So, although the PSS rules allowed you to draw a pension at that time, the taxation of that pension is different until you reach the age of 60.

“When you receive a pension under preservation age. It is simply taxed at your marginal tax rate on each component other than the tax-free. The tax-free is always tax-free because it comes from your personal contributions, for which no tax deduction was available.

“Further, there is no offset against that pension until you reach preservation age.

“When you reach 60 the taxation changes, but your tax-free component is still tax-free. The taxable component becomes tax-free and you are taxed on the untaxed component at your marginal rate, less a 10 per cent tax offset.

“That 10 per cent  is calculated on the amount of the pension. So if your pension is $50,000, you receive a $5000 reduction in your tax. So, after your 60th birthday, you can expect that the way you receive your pension will change as the 10 per cent offset comes into play.

“I should point out, however, that if your pension exceeds a certain figure, then the offset is reduced. As the figure is indexed annually, it is recalculated each year.”

Viraj said he was wondering why he wasn’t getting a reduction in his tax, but now he understood why.

Annie is in a different type of fund and the rules are very different.

I told her: “To start receiving a pension, you need to satisfy a condition of release.

“The conditions of release are firstly that you’ve retired from your job after age 60. You can continue to work in another job after that if you wish.

“So, if you are continuing to work in the same job, you are not eligible to draw your pension. Secondly, if you are still working at age 65, turning 65 allows you to draw your pension and you can continue to work.

“Death also allows your nominated beneficiaries to receive their after-tax shares of your superannuation balance.

“Annie, your superannuation balance is quite small, which means that it may be able to be topped up by a Centrelink pension. However, you cannot receive a Centrelink pension until you are 67. So, you may be wise to continue to work until either 65 or 67, depending on your circumstances at the time.”

Annie said she loved her job and would carry on working while Viraj managed the house.

If you need advice on superannuation or taxation or any business-related accounting matter contact the expert team at Gail Freeman & Co Pty Ltd on 02 6295 2844, email [email protected] or visit gailfreeman.com.au

Disclaimer
This column contains general advice, please do not rely on it. If you require specific advice on this topic please contact Gail Freeman or your professional adviser. Authorised Representative of Lifespan Financial Planning Pty Ltd AFS Lic No. 229892.

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