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Home / In retirement / Accessing super / How lump sums can reduce your transfer balance account

How lump sums can reduce your transfer balance account

Once you retire and transfer your superannuation into a retirement phase pension account, planning how you access your savings is extremely important.

It can create opportunities later in life to make additional super contributions and increase the amount you have in retirement phase where the fund earnings remain tax free.

To understand why this is an important issue, we need to first revisit a few superannuation fundamentals including:

  • The difference between pension payments and lump sums
  • The transfer balance cap rules and how they operate
  • How different super payments affect your transfer balance account.

What is a pension?

The term ‘pension’ refers to an ongoing obligation to make a series of payments from a super fund where each ongoing payment relates to the others.

For instance, if a member makes a written request to commence a pension and receive a regular payment each month from their fund, then these monthly payments would be pension payments.

The same could be said if the member elected instead to have these payments made weekly or fortnightly or even if they elect for only one pension payment annually from their fund. These would all be considered pension payments due to the ongoing obligation for the trustee of the fund to make these payments, with each payment in the series relating to the other payments.

The key is having the appropriate documentation in place at the start of the pension.

What is a lump sum?

In contrast to pension payments, a ‘lump sum’ refers to a one-off payment from a super fund on the written request of a member. Once paid, there is no ongoing obligation to make any further payments.

Related topics,

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Responses

  1. Andrew Purdam Avatar
    Andrew Purdam

    I know that this was about taking a lump-sum instead of drawing a higher pension, but what are the effects of drawing from the accumulation instead (assuming there’s an accumulation account alongside the pension account)? I can imagine changes to the tax-free percentage in the total balance, 15% tax imposed on the taxable amount of the withdrawal. I’d like to understand more about this.

    1. SuperGuide Avatar
      SuperGuide

      Hi Andrew,
      Making withdrawals from an accumulation account won’t affect the amount in your transfer balance account like lump sum withdrawals from a pension do.

      Withdrawals from an accumulation account are drawn proportionally according to the tax components that make up the account on the day of the withdrawal. For example, if the account is made up of 20% tax-free component and 80% taxable component, the withdrawal will also be 20% tax-free and 80% taxable. No tax is applied to the taxable component when the individual making the withdrawal is 60 or more, unless the withdrawal is from a constitutionally protected (untaxed) super fund.

      Read more about the proportioning rule, lump sum withdrawals from accumulation accounts and the recontribution strategy for modifying tax components.

      Best wishes
      The SuperGuide team

  2. Neil McQuinn Avatar
    Neil McQuinn

    In your table above on the lump sum draw down option, if during the 12 months the returns into your fund makes it exceed the transfer balance cap, can you still put more money in?

    1. SuperGuide Avatar
      SuperGuide

      Hi Neil,

      An example may be the best way to illustrate this scenario.

      Imagine an individual starts a pension with $2 million and their transfer balance cap is also $2 million. A year later, the balance of their pension account is $2.5 million thanks to an incredibly strong investment return.

      If they then make a lump sum withdrawal of $200,000 from the pension, this amount is subtracted from their transfer balance account, reducing its balance to $1.8 million. They now have space to start a second pension with $200,000 without exceeding their transfer balance cap. The balance of their current pension is $2.3 million after the withdrawal but this is not relevant for the purpose of determining whether they have space to start a new pension. That decision is based only on the value in their transfer balance account.

      Learn more about how the transfer balance cap and transfer balance account operate.
      Best wishes
      The SuperGuide team

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