Super lump sum withdrawals: Everything you need to know

Once you meet any of the conditions of release, you are free to withdraw your super as a lump sum (or several lump sums). You also have the option to take your super account as an income stream (also known as a superannuation pension) or as a combination of lump sum and income stream.

2. What tax will I pay if I choose a lump sum?

Once you turn age 60, most people can access their super savings tax free. (Members of untaxed funds, such as government super funds, may have different tax rates.)

In general:

• If you’re aged 60 or over when you retire, you can access your super tax free, regardless of whether you decide to take lump sum payments, an income stream or a combination of the two.
• If you’re under age 60, you may have to pay tax on any super you withdraw, regardless of how you decide to withdraw it. The amount of tax you pay will depend on whether your payment contains a taxable component, a tax-free component or both.

3. Can I take all my super as a lump sum?

The short answer is yes, you can withdraw your entire super account balance as a lump sum if you like.

The government’s 2020 Retirement Income Review noted research by the Productivity Commission (PC) found less than 30% of super benefits were taken as lump sums. Most people with smaller super account balances (less than $10,000) choose to take lump sums, but as people’s super balance gets larger, the percentage of people taking their super as a lump sum tends to decrease.

The PC research found lump sums were generally used to pay down debt, invest in income stream products, or purchase durable household goods such as cars and fridges to use throughout retirement.

4. What are the pros and cons of taking a lump sum?

Benefits of a lump sum:

• You’re free to spend or invest the lump sum any way you choose.
• You can use the money to pay off your mortgage.
• You can use the money to renovate your home, buy a new car, or purchase items you will need for your retirement years.
• You can choose an investment strategy that suits your personal circumstances.
• You’re not required to make a minimum withdrawal as you are with an income stream. Learn more about minimum pension amounts.

Drawbacks of a lump sum:

• You’re responsible for managing your spending to ensure your money lasts for your entire retirement.
• You’re responsible for investing the lump sum to generate an income to live on.
• You won’t receive a regular income payment to live on, so you need to budget carefully.
• Investing your lump sum after you withdraw it may affect your entitlement to an Age Pension.
• If you overspend, your savings may run out too quickly.
• Once your lump sum is spent, you may be forced to rely on the Age Pension if you have no other financial assets.
• You may have an annual tax bill if you invest your lump sum and receive investment earnings or interest on the money.
• You may need to pay capital gains tax (CGT) when you sell an investment asset purchased with your lump sum.
• Withdrawing a lump sum may affect your transfer balance account (TBA). Learn more about the Transfer Balance Cap.

5. Can I start a super pension and withdraw a lump sum later?

There are no rules stopping you from starting an income stream with your retirement savings and then deciding to take a lump sum from your super pension account at a later date.

If you decide to start a regular super pension in retirement, many super funds allow you to make a lump sum withdrawal at any time, but it’s important to check the rules applying to your chosen pension account.

Generally, there is no charge for a lump sum withdrawal from the funds supporting your income stream payments.

6. Do I have to transfer my super into retirement phase before I can withdraw a lump sum?

No, if you are eligible to make a lump sum withdrawal you do not have to transfer all your super account balance into the retirement phase to make the withdrawal. Once you meet a condition of release (see earlier section), you can make a lump sum withdrawal at any time.

The rules are slightly different if you want to start an income stream (super pension). You cannot start an income stream if all your account balance is still in the accumulation account. You are required to transfer some of your account balance into the retirement phase to support your regular pension payments.

It’s important to note there are no rules forcing you to transfer all your super from accumulation to retirement phase when you retire or reach Age Pension age. In fact, there can be benefits (such as a lower tax rate or valuable insurance cover) for some people if they leave some of their super in the accumulation phase.

7. Are there any rules on how I use a lump sum? Could I use my lump sum to pay off my mortgage?

There are no rules about what you can spend your super on if you choose to take it as a lump sum. You can definitely use the money to pay off your home loan if you still have a mortgage in place and for some people, this can be a very sensible strategy.

In fact, the Productivity Commission found most people with small account balances tended to use their super to pay off or reduce their outstanding mortgage debt.

You can also use a lump sum to pay any other debts you have outstanding, to take a holiday, purchase a car or renovate your home so it’s in good shape for your retirement years. However, you also need to think about what you will use for income if all your retirement savings are spent on holidays, home renovations or to pay off debt.

8. What tax applies if I take a lump sum?

Taking your super account balance as a lump sum rather than an income stream makes no difference to the tax you will pay.

If you take a lump sum and then invest it outside the super system (such as in a bank account or managed fund), there will be a difference in the tax rate you pay on any interest or investment earnings received.

When you receive investment earnings or interest on a lump sum invested outside the super system, your earnings are taxed at the normal tax rates applying to income.

If you receive investment earnings on the money supporting regular income stream payments from your super pension account, however, it’s tax free. The government made the tax rules different to encourage people to leave their money in the super system and use it as a retirement income stream.

9. Where can I invest my lump sum?

If you decide to take a lump sum, it’s important to think about where you will invest it if you aren’t planning to spend it or use it to pay off your mortgage or other debts.

There are no rules on where you can invest your lump sum once you withdraw it from the super system. The money becomes like any other financial asset and you are free to spend or invest it any way you choose.

The important thing to remember is if you invest the money outside super, you don’t enjoy the lower (concessional) tax rates applying to money held within the super system. You may have to pay tax on interest or investment earnings generated by your lump sum, plus any capital gain achieved when you eventually sell the investment asset (such as an investment property or shares). The tax rate you could pay on any investment earnings needs to be considered when deciding whether or not to take a lump sum.