Let's celebrate turning 65

It’s my mother’s birthday this month. And while she’s not turning 65, this did make me think about birthdays generally and their relevance to superannuation. Hands down, 65 is the best one to have when it comes to your super.

Some may argue 60 is pretty good. Afterall, it’s at that point most of us will first become eligible to take money out of our own super account. Even better, it will be tax free.

But at 60, there are still strings attached. For those who haven’t retired, super can only be accessed via a “transition to retirement” pension (a pension that limits the amount taken in pension payments each year and doesn’t allow lump sums at all). Those pensions also don’t give all the very best tax breaks possible on the super fund itself. Only people who have retired (and can start a “retirement phase” pension) get these.

In contrast, at 65 everyone can access their super and for the vast majority of people, it’s a time when they have all the choices : start a retirement phase pension even if they haven’t retired, take some or all of it out as a lump sum, do nothing or do some combination.

If they start (or continue) a retirement phase pension, they’re sitting pretty. Retirement phase pensions have no limit on the pension payments, can pay lump sums and get the best tax treatment. Not only are the pension payments tax free to the member, but some or all of the investment income earned by the super fund itself is tax free. Even those not in an SMSF benefit from this tax break – it’s passed on to the pensioner via higher returns (they’re higher because no tax has been taken out).

These days, 65 doesn’t represent the end of opportunities to make contributions either. Once upon a time it did but nowadays, the contribution rules stay exactly the same right up until 67. At that point, nothing changes for people just making contributions from their own money and not claiming a tax deduction for them. It does get a little trickier for those who want to claim a tax deduction (there’s a work test to meet) – but this is still 2 years away at 65!

So 65 is a golden age – it’s possible to both take money out of super and put it in. Sometimes that double opportunity becomes invaluable. My favourite estate planning strategy, for example, is a “recontribution” strategy. We’ve written about this before here. Now the caps on contributions and thresholds have changed since that article was written but the principles remain the same. At 65, it’s possible to make a big difference to the tax potentially paid by your beneficiaries when you die via this strategy.

There are some traps to watch at 65.

For example, a couple using the “contribution splitting rules” will need to re-evaluate. These are rules that let certain contributions made by (say) one person’s employer to be “split” to their spouse (basically the money is moved across to the spouse’s super account). Once you turn 65, you can’t be the receiving spouse (although if you’re the one “giving” the contributions you can keep doing that if your spouse is under 65 and not retired).

It's also a time to watch pensions carefully. Those who had already started a transition to retirement pension when they were over 60 but not retired will find this is automatically reclassified as a retirement phase pension on their 65^th birthday even if they’re still working. Mostly this is good news. But retirement phase pensions (because they’re so good) are limited by the “transfer balance cap”. This is currently $1.9m but will be $2m from 1 July 2025 and it’s the maximum amount anyone can turn into a retirement phase pension over their lifetime. If your transition to retirement pension is worth more than the cap at the time you turn 65, you’ll have a tax problem to deal with.

All in all, while I’m not necessarily wishing my life away at this stage, 65 is definitely a golden age when it comes to super.

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