If you’ve made personal super contributions you plan to claim as a tax deduction, lodge your Notice of Intent and get your fund’s acknowledgement before starting your pension. Once the contributions are used to commence a pension, it’s generally too late to claim.

Starting a superannuation pension is an important step towards retirement. It allows you to start drawing an income from your super savings and, once you’re eligible, can provide significant tax advantages.

However, converting your super from an accumulation account into a pension account isn’t simply an administrative exercise. There are some important tax rules to consider before making the change — and getting the timing wrong could cost you thousands of dollars.

One of the most common traps involves making last-minute personal top-up super contributions that you intend to claim a tax deduction for.

The tax deduction trap when starting a super pension

If you’ve made personal contributions to super and intend to claim a tax deduction for them, you need to make sure you’ve completed the necessary paperwork before starting your pension.

To claim a deduction for personal super contributions, you must submit a valid Notice of Intent to Claim or Vary a Deduction for Personal Super Contributions to your super fund and receive an acknowledgement.

The critical issue is that, once your super fund has used those contributions to commence a pension, it’s generally too late to submit a valid notice.

This means you could permanently lose the tax deduction you were intending to claim.

Example: how a $7,800 tax saving was lost

Consider someone who is approaching retirement and makes a last-minute $20,000 personal contribution to their super fund before starting a pension, intending to claim a tax deduction when they do tax return.

After making the contribution, they contact their super fund and arrange to convert their accumulation account into an account-based pension.

A few months later, after the end of the financial year, when preparing their income tax return, they try to submit their Notice of Intent to claim the deduction.

Unfortunately, because the contribution has already been used to commence their pension, it’s too late.

Assuming a marginal tax rate of 39% (including Medicare levy), they’ve missed out on a potential $7,800 personal income tax saving.

The frustrating part is that this could have been avoided simply by completing the necessary paperwork before commencing the pension.

The right order: contribution, Notice of Intent, then pension

If you’ve made personal super contributions that you intend to claim as a tax deduction, the correct sequence is:

1. Make your personal super contribution and ensure it has been received by your super fund.
2. Submit your Notice of Intent advising the fund how much you intend to claim as a tax deduction.
3. Receive written acknowledgement from your super fund confirming that your notice is valid.
4. Only then commence your pension, once you’ve considered the other relevant tax and financial planning issues.

Don’t assume you can sort out the deduction when your accountant prepares your tax return. By then, it may be too late.

Withdrawals and rollovers can also cost you the deduction

It’s not just starting a pension that can cause problems. Similar issues can arise if you withdraw money from super or roll it over to another fund before submitting your Notice of Intent.

Depending on the circumstances, these transactions can reduce the amount you’re entitled to claim as a deduction, or prevent you from claiming it altogether.

If you’ve made personal contributions and intend to claim a deduction, it’s important to deal with the notice before withdrawing, rolling over or converting your super into a pension.

Four other things to check before starting your pension

The Notice of Intent is just one consideration. There are several other matters worth reviewing before converting your accumulation account into a pension.

1. Are you eligible to start a pension?

Reaching preservation age doesn’t automatically mean you can access all your super without restrictions.

Generally, you need to have met a condition of release, such as retirement or reaching age 65, to commence an unrestricted account-based pension.

If you’ve reached preservation age but are still working, you may be eligible for a transition-to-retirement pension. However, different withdrawal restrictions and tax rules apply.

2. How much can you transfer into pension phase?

There is a limit, known as the transfer balance cap, on how much super you can transfer into retirement-phase pensions.

Your available cap will depend on your circumstances, including whether you’ve previously commenced a pension.

It’s important to check your position before transferring money into pension phase, particularly if you have multiple super accounts or existing pensions.

3. Have you considered the taxable and tax-free components of your super?

Your super balance generally consists of taxable and tax-free components.

When you commence a pension, the proportions of these components are calculated and generally remain fixed for the life of that pension.

This can have important estate planning implications, particularly if your super may eventually pass to adult children who are not financially dependent on you.

In some circumstances, there may be opportunities to improve the tax-free component of your super before starting a pension. However, these strategies need to be carefully planned.

4. Do you understand the minimum pension requirements?

Once you’ve commenced an account-based pension, you generally need to withdraw a minimum amount each financial year, based on your age and pension balance.

Failing to meet the minimum requirements can affect the tax treatment of your pension, so it’s important to understand your obligations and ensure you have sufficient cash available to make the required payments.

Get advice before making the change

Starting a super pension can provide significant benefits, including tax-free investment earnings within retirement phase and a regular income to support your retirement.

But it’s worth taking the time to get things right before making the change.

Your super fund may be able to process your pension application, but that doesn’t necessarily mean it has reviewed your personal tax circumstances, checked whether you have outstanding contribution deductions or considered your broader retirement and estate planning needs.

At DFK Everalls and Everalls Wealth Management, our accountants and financial advisers work together to help clients navigate these decisions — ensuring the tax, superannuation and retirement planning implications are considered before commencing a pension.

If you’re thinking about starting a super pension, speak with us before submitting your application. A little planning beforehand could save you thousands of dollars and help you make the most of your retirement savings.

This article provides general information only and does not take into account your personal circumstances. Tax and superannuation rules can be complex, and you should obtain appropriate professional advice before making decisions about your superannuation.