What are the lump sum withdrawal rules for SMSFs?

The process of taking a lump sum payment is relatively easy. For a large super fund, it involves writing a letter telling the fund trustee you have reached your preservation age, have met a condition of release, and wish to take a lump sum.

For an SMSF, the process is essentially the same. The member would write to the fund trustee setting out the details of the condition of release that has been met. The SMSF trustees would then have a meeting and pass a resolution to make the requested lump sum payment, noting the information provided by the member and their eligibility to receive a lump sum.

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Minutes of that meeting would of course need to be kept as part of the fund’s records.

The monies could then be withdrawn as cash or as a transfer of a fund asset, referred to as an in-specie benefit payment.

Can I withdraw a lump sum from my accumulation account in my SMSF?

The simple answer is yes, so long as you have met a condition of release that allows unrestricted access to your super and so long as there is no restriction imposed by your SMSF trust deed. 

If you are over 60 and are withdrawing an amount from an accumulation account, the amount will be tax free if you meet a condition of release. You won’t be able to withdraw the amount if you don’t meet a condition of release. Turning 65 is a condition of release, whether or not you are still working.

If you’re looking to withdraw a lump sum from your accumulation account, and you are younger than your preservation age, you will only be able to access your super in very limited circumstances.

What are the options if all your super is in a pension?

If you’ve already started a pension you can still withdraw a lump sum, you just need to be careful that the minimum pension for the year is still paid. Any amount that is taken as a lump sum payment cannot be used to satisfy the minimum pension payment required for the year.

In order to withdraw the lump sum, you would write a letter to your super fund requesting to commute part of your pension as a lump sum payment. The fund trustees would then discuss this request at a trustee meeting and minute their decision to make the payment (or not).

Again, minutes of that meeting would need to be kept.

Strategy: Lump sum from a pension

Where a super fund member in retirement phase wants to access benefits from their fund that EXCEED their mandated minimum pension payment for the year, they may want to consider accessing that extra amount as a lump sum (commutation) from their existing pension.

This is done by making a written request to the fund trustees for an additional lump sum payment to be made from the member’s existing pension account and for that payment to be treated as a lump sum (commutation) and not a pension payment.

The reasoning for this is due to the interaction between pension payments, lump sum payments and the transfer balance account.

The transfer balance cap is a lifetime limit imposed on the superannuation savings you can move into retirement (or pension) phase, where fund earnings on its assets are tax free. Once a member reaches their “cap” limit, they are no longer allowed to move any further amounts into the tax-free retirement phase.

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It is also important to note that pension payments from a pension account DO NOT have any effect on the member’s transfer balance account. BUT lump sum payment from pensions do have an effect, by reducing the amount that is assessed against the members transfer balance cap. 

So, by electing to treat a payment from the pension account as a lump sum, it could allow the member to then move funds from their accumulation account into the tax-free retirement phase.

What happens when you have both accumulation and pension benefits?

Nothing really changes in these circumstances. Where eligible, a fund member is still allowed to access a lump sum from either their accumulation or pension account.

The key issue is that the member’s written request for the lump sum payment needs to clearly identify from which of their accounts the lump sum payment is to be made from.

A super lump sum may affect your Age Pension

What you do with your lump sum after you withdraw it from super may also impact your access to the Age Pension.

In short, if you spend your lump sum – or perhaps upsize your home – then this might not impact how much Age Pension you are eligible for. But using your lump sum to invest outside super, or even keeping some of it in the bank, could reduce your Age Pension entitlement.

Q&A: Is TBAR reporting required for lump sum payments?

The following question was sent in by a member for one of our Q&A webinars.