SMSFs: What are the lump sum withdrawal rules?

For those who have reached their preservation age but are not yet 60, retiring means that you have ceased gainful employment and don’t intend to be gainfully employed in the future. All the trustees of the SMSF need to be satisfied that this will be the case and may ask the trustee to sign a declaration confirming they no longer intend to work.

Your preservation age depends on when you were born and is gradually increasing, as the table below shows.

Source: ATO

Not quite 60

If you access your super early, even if you have reached your preservation age and meet a condition of release, you will need to calculate your taxable and tax-free portions when you withdraw a lump sum. You will only pay tax on the taxable portion of your lump sum. Your tax-free component is the total of all the non-concessional contributions you have made to your super fund over the years.

For the taxable portion you can withdraw up to the low-rate cap tax free. This is currently $215,000 but will increase to $225,000 in 2021/22. This amount is indexed in line with movements in Average Weekly Ordinary Time Earnings (AWOTE) in increments of $5,000 and is rounded down.

Any amounts above the low-rate threshold will be taxed at 17%, or your marginal tax rate, whichever is lower. The 17% includes the Medicare levy.

Larger superannuation funds keep a track of your taxable and tax-free components, and many of the SMSF administration platform providers also track this amount on their platforms.

However, you will be in a very different tax position if you access the lump sum over 60 years old because it will be totally tax free.

How do I take a lump sum?

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

For an SMSF, the trustee would also write a letter stating the same. The fund would then have a meeting and pass a resolution deciding the retiring trustee was eligible to receive a lump sum. 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The monies could then be withdrawn as cash or as a transfer or investments.

Can I withdraw a lump sum from my accumulation account?  

During COVID-19, and up until the end of December 2020, if you were experiencing hardship due to the pandemic, you were able to access your super for two amounts of up to $10,000.

If you withdrew money under the early release scheme you do not need to include the amount in your tax return or pay tax on it.

However, under normal circumstances, 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 superannuation in limited circumstances. In our article When can I access my super? All conditions of release explained we explain how you may be able to get early ‘legal’ access if you meet certain conditions concerning financial hardship, compassionate grounds or if you’re permanently incapacitated or suffer from a permanent disability.

In these cases, when withdrawing a lump sum and the trustee or member hasn’t reached preservation age, the amount will be taxed at 22%, or the member’s marginal tax rate, whichever is lower. The 22% includes the Medicare levy.

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.

What are the options if you have already started 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, or the amount to be paid is available in the fund.

In order to withdraw the lump sum, you would write a note to your super fund saying you wanted to commute part of your pension to a lump sum that would be discussed at a trustee meeting and minuted.

While previously the lump sum could have been counted towards the minimum pension payments, since new regulations were introduced on 1 July 2017 this is no longer the case.

Recontribution strategy (if you are under aged 60)

This is a strategy designed to increase the tax-free amount of super funds, which can be beneficial if you decide to commute to a pension instead of taking a lump sum.

In this instance, a person who has met their preservation age and a condition of release, but who is not yet 60, may decide to take a lump sum up to the low-rate threshold of $215,000. This threshold is an indexed lifetime limit – that is, it restricts anyone from continually withdrawing and recontributing each year.

The person could then recontribute it back into super as a tax-free amount, thereby increasing the total tax-free amount within super. They couldn’t take a lump sum again with that same limit, but where it could be beneficial is if that person decided to use their super to purchase an income stream before age 60. They would then be eligible for a 15% pension offset on the taxable component of that income stream and the tax-free component of the income stream would be tax free.

Recontribution strategy over age 60

A recontribution strategy could still be desirable for a member over age 60 if they want to increase the tax-free portion of the fund to protect their dependants from paying excessive tax on their death.

As explained earlier, if you are over 60 years old and have met a condition of release, your super payment is tax free. You are therefore free to recontribute the amount back into super to increase its tax-free portion.

If you are between 65 and 74 you must also meet the work test to be able to contribute to superannuation, which means working 40 hours in 30 consecutive days in a financial year. (As part of the 2021 Federal Budget, the work test will be abandoned from 1 July 2022).

Also, don’t forget the annual contribution caps. There is the $25,000 annual concessional limit (rising to $27,500 on 1 July 2021) and the $100,000 non-concessional cap (increasing to $110,000), or the three year bring-forward rule that allows $300,000 (rising to $330,000 from 1 July 2021) if your total super balance is less than $1.48 million.

In new regulations coming into effect from 1 July 2019, the government has introduced an exemption from the work test in the first year following retirement for contributions to super.

Your total superannuation balance will also impact your non-concessional contribution limits and whether or not you can access the bring-forward rule. If your total superannuation balance is greater than, or equal to, $1.48 million and less than $1.59 million then you will only be able to access a two-year bring-forward cap of $220,000. If it is greater than or equal to $1.59 million and less than $1.7 million you only have access to the annual $110,000 limit and no bring-forward rule. You cannot make any contributions if your balance is $1.7 million or more.

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 income streams or 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 have an impact on your Age Pension entitlement.