Reinvest your superannuation benefits to minimise tax

Undeducted contributions are very tax-effective when used to purchase a retirement income stream. They are not subject to tax if withdrawn as a lump sum and, more importantly, they form part of the "deductible amount" if they are used to purchase an income stream. The deductible amount is the tax-exempt component of income payments.

For this reason, you should generally try to maximise the amount of undeducted contributions you use to purchase a retirement income stream. One way to do this is to withdraw a portion of your super benefits prior to retirement (subject to satisfying a condition of release), and then re-contribute the amount back into superannuation.

How does the strategy work?

Generally speaking, if you are over 55, satisfy a condition of release and your money is in a complying super fund, you may be able to withdraw your post-June '83 component without paying any tax. Provided you are eligible to contribute, you can subsequently invest these (and other) savings into your super fund for the purposes of rolling over to purchase a retirement income stream.

The effect of the strategy is that you reduce your post-June '83 component (which would otherwise form part of the taxable portion of your income payments) and increase your undeducted contributions (which form part of your tax-exempt deductible amount). This can substantially reduce the amount of tax you pay each year, thereby generating extra benefits to support you in retirement.

Note: If you have a pre-july '83 eligible service period, you will also have to withdraw some of your pre-july '83 component in addition to your post-June '83 component. The tax payable on the pre-july '83 component is however extremely low.