SMSFs: What are the lump sum withdrawal rules?

However, just because you’ve reached 60 doesn’t mean you can automatically receive your superannuation benefits. You also need to meet a condition of release. Those conditions include retiring from an employment or turning 65. (Read our article When can I access my super? All conditions of release explained to learn about all conditions of release).

Retiring, for the purposes of accessing your superannuation funds for anyone between their preservation age and age 60, means that you don’t intend to work for more than 10 hours in each week 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 such hours.

Your preservation age depends on when you were born and is getting older and older. Currently it is 57 but as per the table below, it will soon reach 60 years old.

Source: ATO

Not quite 60

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

For the taxable portion you can withdraw up to the low rate cap, which will also be tax-free. This is currently $205,000 but will increase to $210,000 next financial year. 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 per cent, or your marginal tax rate, whichever is lower. The 17 per cent 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 post 60 years old because it will be totally tax free. 

Case studies

How do I take a lump sum?

The process of taking out a lump sum payment is relatively easy. For a large superannuation fund it would involve 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. The meeting would of course need to be minuted and that minute 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?  

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, but these circumstances are mainly around meeting conditions concerning 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 per cent, or the members marginal tax rate, whichever is lower. The 22 per cent includes the Medicare levy.

If you are over 60 and are withdrawing an amount from an accumulation account – for example if you have in excess of $1.6 million in a retirement account and the excess is sitting in 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 around ensuring 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 superannuation fund saying you wanted to commute part of your pension to a lump sum which 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 superannuation 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 $205,000. This threshold is an indexed lifetime limit – i.e. it restricts anyone from continually withdrawing and recontributing each year.

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

See SuperGuide article Your tax guide to accessing your super under age 60 for more information.

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 dependents from paying tax on their demise if the dependants were left to deal with their superannuation funds.

As explained earlier, if you are over 60 years old and have retired, your superannuation payment is tax free. You are therefore free to recontribute the amount back into super to increase its tax-free proportion.

If you are between 65 and 74 you also have to meet the work test to be able to contribute to superannuation, which means working 40 hours in 30 consecutive days in a financial year and don’t forget the annual contribution caps. There is the $25,000 annual concessional limit and the $100,000 non-concessional cap, or the three year bring forward rule which allows $300,000.

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 superannuation.

You also need to be aware of your total superannuation balance and how close it is to the limit of $1.6 million. If your superannuation is $1.6 million or more at the end of the previous financial year you are not allowed to make any non-concessional contributions to superannuation.

However, if it is between $1.5 million and $1.6 million you can contribute up to the $100,000 annual non-concessional contribution cap. If your balance is between $1.4 million and $1.5 million you can only bring forward one year of non-concessional contributions which is an effective cap of $200,000.  If your balance is less than $1.4 million it’s business as usual for non-concessional contributions i.e. you can contribute up to $100,000 in any year and access the bring forward rule and contribute up to $300,000.

How a lump sum can affect your Age Pension

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

The assets test thresholds for the full Age Pension are as follows.

A principal residence (plus surrounding land up to 2 hectares on the same title) is exempt from the assets test, but if your superannuation payment is more than the above your Age Pension will be impacted.

You will be able to access a part Age Pension up to the following amounts.

These limits are not just for cash account balances but also for financial investments such as a share portfolio or real estate investments outside your family home.

There is also an income test. For investments this is calculated through deeming. The rate your investments are deemed to earn is calculated depending on the balance and whether you’re single or not.

If you’re single the first $51,200 has a deemed rate of 1.75 per cent applied. Investments over that amount are deemed to earn 3.25%.

If you’re in a relationship and at least one of you receives the Age Pension, it’s the first $85,000 of your combined financial assets, which has the deemed rate of 1.75 per cent, with anything over that deemed to earn 3.25 per cent.

If your investment returns are actually higher than these deemed rates, that extra amount doesn’t count as your income for income test purposes.

The bottom line is, if you spend your lump sum – or perhaps upsize your home – then this might not impact how much Age Pension you are eligible for, whereas keeping an investing portfolio going with your superannuation lump sum, or even keeping some of it in the bank, could have an impact on your Age Pension.