Understanding super lump sums and your Age Pension entitlement

It’s natural to want the best possible retirement for yourself. For many Australians, that means managing the complex relationship between superannuation and the Age Pension. In this article, Industry Super Australia explains what happens when you take a super lump sum when you retire.

Since its introduction in 1992, Australia’s superannuation system has undergone many changes in law that have forced retirees to think carefully about how they will balance the income they may receive from their super savings with their eligibility for the Age Pension.

Most people will choose from one of these three options:
• withdrawing their entire super balance as a lump sum
• taking a super ‘pension’ (also known as an income stream)
• taking a combination of both the above.

If you are thinking about taking a lump sum to boost your available cash, help pay for home repairs, pay off debts, or spend it in other ways, it’s important to understand how this particular asset may affect your financial position, especially if you plan to rely on a part or full Age Pension.

Retirement age and tax deductions

One of the first things to decide is the age you retire. This impacts when you can take both your super and your pension.

Other than in a few limited situations, such as severe financial hardship or compassionate grounds, you’re not usually able to take money out of your super until:
• you turn 65 (even if you have not retired), or
• you reach your preservation age and retire, or
• under the transition to retirement rules, while continuing to work.

Your preservation age is the earliest age at which you can access your super if you are retired, or have started a transition to retirement income stream. This is different from your pension age and ranges from 55 to 60 depending when you were born.

When you access your super

If you take your super as a lump sum prior to turning 60 due to one of the special circumstances given above, you pay your concessional rate of super tax.

According to the Australian Taxation Office (ATO):
• the rate on the taxed element will be your marginal tax rate or 22 per cent, whichever is lower
• the rate on the untaxed element will be your marginal rate or 32 per cent, whichever is lower.

You would also be leaving the super system.

If you access your super after you turn 60, you don’t pay tax on the tax-free component of your super when you withdraw it, no matter what your age or the way you take it.

Taking a lump sum

The Department of Human Services (DHS) does not treat a super lump sum as income when it comes to calculating your Age Pension entitlement, but you do need to let Centrelink know that you’ve received the lump sum.

Once you take a lump sum from the super system, however, it’s no longer considered to be ‘super’. This means that if you choose to invest your lump sum in other savings options:
• any returns from those investments may be taxed at a higher rate, and
• they may be considered both an asset and an income under the pension eligibility rules.

If you use your lump sum to buy a new asset, such as a car, the DHS could class that as an asset that impacts your pension eligibility. The department provides a more detailed breakdown on its treatment of lump sums.

On the other hand, spending your lump sum on renovations is unlikely to affect your pension entitlement because the Age Pension income and assets tests don’t assess the value of your home (what the DHS calls your “principal residence”).

The expert’s view – the benefits and downsides of taking a lump sum

Sarah Saunders, head of consumer advocacy at Industry Super Australia, explains that for some retirees, taking some or all their super balance as a lump sum can be the most sensible options.

“Some people choose to take a lump sum to avoid moving into retirement with substantial debt,” she says. “Others will use a portion of their super to buy goods they need to see them through a long period of living on a low, fixed income”.

“Home ownership is strongly linked to well-being in older age, so paying down the mortgage on a principal residence, which is excluded from the pension assets test, certainly makes sense”.

A potential downside of taking some or all your super balance as a lump sum is that this could make it more difficult for you to fund what’s likely to be a far longer retirement than your parents enjoyed.

“The downside of delving into your super savings too early is that you could be caught short in the later stages of retirement,” Saunders adds. “[And] greater reliance on the pension could leave you vulnerable to unexpected public policy changes”.

Increasingly, Australians are choosing to leave their superannuation in the tax-effective super environment, with income streams proving to be a popular way of accessing regular payments, even while the remainder of their super balance remains invested and possibly continuing to grow.

It’s always important, however, to speak to your super fund, financial planner and the DHS to navigate the best possible options for your personal situation.

Need advice?

First Super offers its member a range of advice options to navigate your super options before and during retirement. To find out more or to make an appointment with one of our Financial Planners, phone the Member Services Team on 1300 360 988. You can also get help online here.

More details about First Super’s retirement products are on our website.

This article is brought to you by Industry Super Australia.
Article first published on Starts at 60 in July 2018. The information referred to may change from the date of publication and care should be taken when relying on such information.
For more information, please visit www.industrysuper.com. Industry Super Australia Pty Ltd (ABN 72 158 563 270)