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Pension v Lump Sums


 
 
Eligibility for Pension and Lump Sum Withdrawals

Generally, you must reach the preservation age before you can access your super. Use the following table to work out your preservation age.

Date of birth Preservation Age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 01 July 1964 60

If you are under your preservation age, you cannot access your Super Benefit unless you have an unrestricted benefit or are eligible for early access. For more information on the eligibility for early access please click here.

When you reach preservation age you have the option of commencing a Pension Income Stream from your SMSF. There are two types of Pensions you can start in an SMSF namely a "Simple Account Based Pension" (commenced when "Retired" or over 65) and a "Transition to Retirement Income Steam/Pension" (commenced when NOT "Retired" and aged between preservation age and 64). A Pension withdrawal can only be made after you commence a Pension in your SMSF. For more information on Pensions, please click here.

A Lump Sum withdrawal is simply an amount accessed from your SMSF that is not a Pension payment. You can make Lump Sum withdrawals whenever you like from your SMSF once you turn 65 or are aged between preservation age and 64 and "Retired", regardless of whether you have commenced a Pension. You cannot make Lump Sum withdrawals from your SMSF if you are aged between preservation age and 64 and are NOT "Retired". This is the case even if you have commenced a TRIS.

Accordingly, you have the choice between making either Pension or Lump Sum withdrawals only when you have a Retirement Phase Pension (i.e. SABP/R-TRIS). It is important to understand that if you have a Retirement Phase Pension it means you are "Retired" or over age 65 which is a precondition to be able to make Lump Sum withdrawals.

We caution that "Lump Sum" and "Pension" are simply superannuation terminologies used to describe different withdrawal types, they have no direct reference to the frequency or size of your withdrawals. For example, a large amount withdrawn in a single transaction during the year can still be classified as a Pension withdrawal.

 
 
Impact on Personal Tax Return

Taxation of Withdrawals When aged over 60

There is no tax payable on both Pension and Lump Sum withdrawals after age 60.

Taxation of Withdrawals When aged between Preservation Age and 59

When aged between preservation age and 59, Pension and Lump Sum withdrawals may be subject to tax and the tax will differ depending on the withdrawal type you make.

Remember your Super Benefit is made up of two components, namely a Tax Free Component and a Taxable Component. The Tax Free Component typically comes from after tax personal non concessional contributions made by you over time. The Taxable Component typically comes from concessional contributions made by you over time which include employer contributions and salary sacrifice contributions.

Any withdrawals must be paid in the same proportion as the Tax Free and Taxable Components of the Member's interest in the SMSF. This requirement is known as the "Proportioning Rule". Under the "Proportioning Rule" and where the Member is aged between preservation age and 59, the "Tax Free" Component of the withdrawal is tax free. The "Taxable" Component of the withdrawal is taxed differently depending on whether it is a Lump Sum or a Pension. That is the "Taxable" Component of the Pension withdrawal is taxed at the Member's marginal tax rate less a 15% "Pension Rebate". For more information on the taxation of Pension withdrawals, please click here. Alternatively, the "Taxable" amount up to the low rate cap amount of a Lump Sum withdrawal is tax free and the balance is taxed at 17%. For more information on the taxation of Lump Sum withdrawals, please click here.

The application of the low rate threshold for super Lump Sum payments is capped. The low rate cap amount is reduced by any amount previously applied to the low rate threshold.

Income Year Low Rate Cap Amount
2018-19 $205,000
2017–18 $200,000
2016–17 $195,000

Given the difference in the taxation treatment of accessing monies from your SMSF as a Pension or a Lump Sum withdrawal when you are aged between preservation age and 59, it is sometimes preferable to treat withdrawals as a combination of both Pension and Lump Sum if you are eligible to make both types of withdrawal, rather than solely as a Pension withdrawal.

 
 
Impacts Within Your SMSF

Annual Minimum Pension Requirement

When you commence a Pension in the SMSF, you are required to make a minimum pension withdrawal annually. For more information on the minimum pension amount, please click here.

From 01 July 2017, only Pension withdrawals count towards the minimum pension requirement while Lump Sum withdrawals cannot be used to meet the minimum pension requirement. This implies that at least the minimum pension amount must be Pension withdrawals and you can only make a choice between Pension or Lump Sum withdrawals for the amount in excess of the minimum pension amount.

Transfer Balance Account

When you have a Retirement Phase Pension (i.e. SABP/R-TRIS), you are required to report any events that affect your Transfer Balance Account via the Transfer Balance Account Report (TBAR). Lump Sum withdrawals made from a Retirement Phase Pension (i.e. SABP/R-TRIS) are required to be reported via the TBAR by a certain due date while Pension withdrawals are not required to be reported. For more information on the Transfer Balance Account, please click here.

 
 
Centrelink Entitlements

We caution that if you are receiving Centrelink benefits, the withdrawal type might affect your Centrelink entitlements. We strongly suggest you seek professional advice on how the withdrawal type will affect your Centrelink entitlements.

 
 
Comparison Summary

The differences between Pension withdrawals and Lump Sum withdrawals are summarised in the following table.

  Pension Withdrawals Lump Sum Withdrawals
Eligibility After commencing an SABP or TRIS in the SMSF
  1. Over age 65; or
  2. Between the preservation age and 64 & "Retired"; or
  3. Below the preservation age but are eligible for early release.
Personal Tax on withdrawals when aged over 60 Tax Free Tax Free
Personal Tax on withdrawals when aged between preservation age and 59 Taxable Component of the withdrawal is taxed at member's marginal tax rate less a 15% Pension Rebate Taxable Component up to the low rate cap amount is tax free and the balance is taxed at 17%
Count towards minimum Pension requirement Yes No
Affect Transfer Balance Account No Yes (If withdrawn from a Retirement Phase Pension e.g. SABP or R-TRIS)

No (If withdrawn from the Accumulation Account)
Centrelink Entitlements Please contact Centrelink directly on how the withdrawal type will affect your Centrelink entitlements based on your personal circumstances.

 
 
Choosing between Pension and Lump Sum withdrawals

Below are some common scenarios where you must treat certain withdrawals as either Pension or Lump Sum withdrawals and the scenario where you have the choice on the withdrawal type.

Scenario 1: You have not commenced a Pension in the SMSF

If you have not commenced a Pension in the SMSF, you can only make Lump Sum withdrawals from the SMSF, provided you are over age 65 or are between preservation age and 64 and "Retired".

Scenario 2: You have commenced a TRIS and you were aged under 65 and NOT "Retired" when the withdrawal was made

If you are between preservation age and 64 and NOT "Retired", you are not eligible to make Lump Sum withdrawals and can only access your Super Benefit as a Pension withdrawal after commencing a TRIS.

Scenario 3: You have commenced an SABP and you just withdrew the minimum Pension amount during the Financial Year

If you have only withdrawn the minimum pension amount during the Financial Year, the amount withdrawn must be treated as a Pension withdrawal, given that Lump Sum withdrawals cannot be used to meet the minimum pension requirement.

Scenario 4: You have commenced an SABP OR commenced a TRIS previously but have since turned age 65 or declared retirement, AND you withdrew more than the minimum pension threshold during the Financial Year

If you have an SABP or R-TRIS, you are eligible to make both Pension and Lump Sum withdrawals. Given that Lump Sum withdrawals cannot be used to meet the minimum pension requirement, at least the minimum pension amount must be a Pension withdrawal to ensure that the minimum pension requirement can be met. You then have the choice to make either Pension or Lump Sum withdrawal in addition to the minimum pension amount, by considering the impacts of the withdrawals on your personal tax return, Transfer Balance Account and Centrelink entitlements.

Example

Barney is 58 and has a Super Benefit of $1,000,000 made up as follows:

  $
Taxable Component: $800,000
Tax Free Component: $200,000
Total Super Benefit: $1,000,000

In the above example this means that 80% ($800,000/$1,000,000) of Barney's Super Benefit is taxable and 20% ($200,000/$1,000,000) is tax free. Barney commences a Simple Account Based Pension on 1 July and must access 4% of his Super Benefit as a Pension (i.e. $40,000).

Assume Barney decides to access $200,000 from his SMSF in the 2018-2019 Financial Year. If the entire amount was treated as a Pension withdrawal, Barney would pay a whopping $25,897 in tax. That is he would be taxed on 80% of the Pension Income of $200,000 (i.e. $160,000). Tax on $160,000 is $49,897. After applying a 15% "Pension Rebate" of $24,000 ($160,000 x 15%) the net tax payable is $25,897.

If Barney alternatively had chosen to take the minimum Pension of $40,000 only and treat the additional withdrawal of $160,000 as a Lump Sum withdrawal, the tax result would be completely different. That is on the $40,000 Pension withdrawal, Barney would be taxed on 80% of the Pension income (i.e. $32,000). Tax on $32,000 is $2,617. After applying a 15% "Pension Rebate" of $4,800 ($32,000 x 15%) the net tax payable is $0. It is noted that if the Pension Rebate creates a refund the refund is lost.

On the remaining $160,000 Lump Sum withdrawal, Barney would be taxed on 80% of the Lump Sum withdrawal (i.e. $128,000). Given that Barney can access the first $205,000 (i.e. the low rate cap amount for the 2018/2019 Financial Year) in Lump Sum withdrawals tax free, the entire $128,000 would be tax free.

This means that Barney's withdrawal of $200,000 is now completely tax free (i.e. a Pension Withdrawal of $40,000 that is tax free plus a Lump Sum withdrawal of $160,000 that is tax free). This simple strategy has saved Barney $25,897.

Remember that Barney cannot treat the entire $200,000 as Lump Sum withdrawal as he would fail to meet the annual minimum pension requirement in this case and at least $40,000 (i.e. $1,000,000 x 4%) must be treated as a Pension withdrawal. He will also need to report the $160,000 Lump Sum withdrawal via the TBAR.

 
 
Seek Professional Advice from a Financial Adviser

ESUPERFUND is a no advice model and does not provide financial advice to clients. We recommend that you seek professional advice from a financial adviser on the withdrawal type in view of your personal circumstances. A licensed financial adviser will consider your personal situation and make a recommendation suitable to your financial needs.

It should always be remembered that Trustees are legally responsible for all the decisions made even if you obtain advice from a Financial Planner. Whilst a Financial Professional can provide advice and assistance you are ultimately responsible for the Fund.

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