When partially or fully funding your retirement from your super benefits, you have several options. You can choose to take your super benefits as:
- One lump sum
- An ongoing retirement income stream
- A combination of both.
Most people choose the third option, taking part of their benefits as an ongoing retirement income stream and part as a lump sum. A lump sum can be taken from time to time and then used to pay for something like a holiday, a new car, an outstanding debt or a home improvement.
It’s important to note that taking a lump sum requires a condition of release to be met. From a retirement perspective, the condition of release can be:
- Permanent retirement, after reaching preservation age
- Termination of employment after reaching age 60, or
- Reaching age 65.
In addition, it’s important to understand the tax implications of taking a lump sum. Most super benefits are comprised of two components:
- A tax-free component, and
- A taxable (taxed element) component
The tax-free component usually consists of non-concessional contributions. (Note: A re-contribution strategy can be one way to increase the tax-free component. This can be helpful in providing a more tax-effective retirement income stream if taken before age 60, and/or decreasing the tax payable on your death benefit if it’s paid to a non-dependent for tax purposes. If you have questions about this option, speak to a licensed financial adviser.)
The taxable component is usually the remaining balance, consisting of concessional contributions (e.g. Super Guarantee, salary sacrifice and personal deductible contributions).
A lump sum withdrawal must come proportionally from these two components. Calculating the proportions depends on the time, or phase, when the sum is taken:
- If the lump sum is accessed from the accumulation phase, the proportions are calculated just before the withdrawal is paid
- If the lump sum is accessed from the pension phase, the proportions are calculated at the commencement date of the relevant pension account.
When taking a lump sum, no tax is payable on the tax-free component. However, depending on your age and the amount withdrawn, tax can be paid on the taxable amount.
Finally, it’s important to remember the following restrictions and requirements:
- A lump sum withdrawal isn’t generally allowed in an accumulation phase transition to retirement income stream (with the exception of, for instance, unrestricted non-preserved benefits, family law splits, or commutations/’rollbacks’ to an accumulation account)
- A lump sum withdrawal isn’t counted towards the minimum annual pension payment of a retirement income stream
- A lump sum withdrawal from a retirement income stream will result in a debit to your transfer balance account.
When considering a lump sum withdrawal, it’s important to understand your options and appropriateness to your financial situation, goals, and objectives.
If you need assistance in preparing for retirement or have additional questions about lump sum withdrawals, contact our financial planning experts at Accru Harris Orchard today.
Disclaimer: The information contained in this article is based on information believed to be accurate and reliable at the time of publication. To the extent permissible by law, neither we nor any of our related entities, employees, or directors give any representation or warranty as to the reliability, accuracy or completeness of the information; or accepts any responsibility for any person acting, or refraining from acting, on the basis of information contained in this blog. This information is of a general nature only. It is not intended as personal advice and does not take into account the particular investment objectives, financial situation, and needs of a particular investor. Before making an investment decision you should speak with your financial planner to assess whether the advice is appropriate to your particular investment objectives, financial situation, and needs
