Q&A: What is the tax treatment on lump sum withdrawals when 65 and not retired?

So, probably best if we start with the accessing rules. In order to get access or gain access to our super savings, we first need to meet a condition of release. The conditions of release are the events that might occur that then allow us access to our accumulated superannuation savings. Now, the ones that I’ve put mentioned in these slides are the most common ones. They’re not an exhaustive list. But for someone over 65, I’ve just put here what the most relevant rules are.

The first one is that you need to attain your preservation age and then retire. And you’ll see on the right-hand side there in that golden yellow box, I’ve given you the various preservation age. As you’ll see there, anyone born before 1 July 1960 has a preservation age of 55, and it goes up by one year for each of those years after age 55. So essentially what we’ll see soon from 1 July, essentially 2024 is that everyone will have a preservation age of 60 moving forward if you’re born after 1 July 1964. That’s based on no changes to legislation. So, you need to attain your preservation age and retire

The second one is you could attain your preservation age and start a transition to retirement pension, not relevant here, but that’s the second condition of release. Another one is to cease an arrangement under which you’re gainfully employed on or after turning age 60.

Now for Andrew’s question here, where he said he’s already over 65, you’ll see there that the most relevant condition of release is attaining age 65. So a member who has reached age 65 may cash their benefits at any time. There are no cashing restrictions, which means the benefits can be paid as an income stream or as a lump sum. So, for Andrew, he’s talked about accessing benefits after a 65, he would be allowed to do that.

We then look at tax on those benefit payments, and that’s affected really by three separate issues. So the tax payable on your own benefits when you withdraw them are affected by your age, the tax components that make up your benefits, and how you access these benefits. So for instance, your age when you access the benefits, the tax would be different if you access them under preservation age, so below age below 55 to 60. If you access them above preservation age, but still under 60, or where you are over or under 60. I’ll take you through each of those, don’t worry.

We then look at the tax components. When you take that payment from your superfund, it’ll be broken up into three separate components. Those components are the tax-free component, the taxable tax component, and the taxable untaxed component. And then, of course, how you take that by way of a pension, a lump sum, or a combination of both.

So, if we look at our particular question here for someone who’s over 65, not retired but still working, they are allowed to access their benefits. They’ve attained age 65. The fact that they’re still working doesn’t matter. They can access their super because they’ve met that condition of release of turning 65. The lump sum is the way that he wants to access his money. So therefore, it would be tax free. There’d be no tax payable because the individual here, Andrew, has attained age 65. He’s taking his money from his taxable tax component, and it’s a lump sum, so no tax payable.

Now, just for completeness, if Andrew had any benefits here that were classified as taxable untaxed element, there would be some tax payable. It’d be at marginal tax rates. So, it would just be included in your assessed income and tax your marginal rate, or 17 %, whichever is lower. It’s the lowest of those two rates. Now, that would only really be relevant when, for instance, there was money coming from an untaxed super fund. So, if you didn’t pay tax on the money going in or tax on the earnings, this is for an untaxed fund and not relevant for most accumulation style funds. But that is just something to be aware of.

Now, if you’re looking to find out more on that, have a look here at the How superannuation is taxed: Super for beginners guide on the website. You’ll see there I’ve just given you a snapshot of what that article looks like. Andrew, I hope that answers your question.