Often, as you begin transitioning to retirement, there are certain capital expenses that you would like to cover. You might want to upgrade your car, cover the cost of a holiday, purchase a new campervan or maybe even pay down some residual debt.
So, is it possible to make a lump sum withdrawal from super as you transition to retirement? Let’s find out.
How to Make a Transition to Retirement Lump Sum Withdrawal
A transition to retirement lump sum withdrawal can be made, but you need to meet certain conditions.
If you are transitioning to retirement after having met a full superannuation condition of release; thereby giving unrestricted access to your super, then you are able to make a lump sum withdrawal from your super account, even if you are still in the process of transitioning into official retirement.
However, if you are still working and are limited to accessing your super in the form of a transition to retirement pension, then there are limitations on the way in which you can access your super.
Can You Take a Lump Sum from a Transition to Retirement Pension?
Yes, you can take a lump sum from a transition to retirement pension, but the lump sum must actually be classified as a pension payment. Let me explain.
When you start a transition to retirement (TTR) pension, you are required to receive total annual pension payments of between a minimum and maximum threshold each financial year. However, there is no requirement to take these payments in any type of regularity or frequency.
TTR pension payments are generally paid monthly, but (depending on your super fund) you can take the payments weekly, fortnightly, quarterly, or whatever floats your boat. In fact, you may choose to take your TTR pension payment as a one-off lump sum withdrawal in one particular month each year. You see what I’m saying? So, technically, it’s a pension payment, but you took it as a once-per-year lump sum payment.
How Much Can You Draw from a Transition to Retirement Pension?
The amount you can draw from a transition to retirement pension is based on your account balance and the minimum and maximum payment factor thresholds.
Specifically, you are permitted to receive pension payments of between 4% and 10% of your TTR pension balance each financial year. These are the minimum and maximum thresholds which are calculated at the commencement of the pension and then again on 1 July of each financial year.
For example, if your TTR pension balance was $500,000 on 1 July, your minimum pension threshold would be $20,000 and your maximum would be $50,000. You would need to receive a total income of between these amounts throughout the financial year.
If you commence a TTR pension part way through a financial year, or stop it before the end of a financial year, the minimum amount is proportionate, but the maximum 10% amount remains the full amount.
Do You Pay Tax on Transition to Retirement Pensions?
Yes, there are three types of tax that you pay on transition to retirement pensions. You pay income earnings tax, capital gains tax and potentially tax on pension payments.
Each of these taxes are explained below:
1. Transition to Retirement Income Earnings Tax
When you start a transition to retirement income stream, your balance will be invested based on the investment option/s you have chosen. Such investment options will produce investment income returns in the form of interest, dividends, distributions and/or rent. These income received within a transition to retirement pension account are taxed at a flat rate of 15%.
2. Transition to Retirement Capital Gains Tax
Some investments within your transition to retirement pension account might also have the ability to increase in capital value, such as managed funds, shares and property. If you sell any portion of your investment and a capital gain is realised (i.e. you sold it for more than you bought it for), a flat capital gains tax rate of 15% will be applied to the gain received. However, if you had owned the investment for a period of 12 months or more, you will receive a 1/3rd capital gains tax discount and will only effectively pay 10% capital gains tax on the gain.
3. Transition to Retirement Pension Payments Tax
In addition to investment earnings in the form of income and capital gains, you may also be liable to pay tax on pension payments that you receive from your transition to retirement pension into your personal bank account.
Generally, pension payments received from a TTR pension when aged 60 or over will be received completely tax-free. However, if you are under age 60, the taxable portion of your pension payment will be taxed at your marginal tax rate. But, you will receive a tax offset equal to 15% of the taxable portion of the pension payment. The tax-free portion will always be received tax free.
Read More: 3 Reasons You Should Start a TTR Pension
The taxable portion of a pension payment can be found by contacting your super fund and asking them the tax-free and taxable portion split of your TTR pension.
In my opinion, transition to retirement strategies benefit more pre-retirees than any other superannuation strategy. If implemented correctly, it provides the flexibility to simultaneously access super, reduce tax and accumulate super in your final working years, which can significantly increase your superannuation balance upon retirement.
Our financial planning firm, Toro Wealth, specialises solely in helping 50 to 70 year-olds optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.
Articles You Might Also Like:
- SUPERANNUATION INDUSTRY (SUPERVISION) REGULATIONS 1994 – REG 6.01 Interpretation 2023, Austlii.edu.au, viewed 20 August 2023, <http://classic.austlii.edu.au/au/legis/cth/consol_reg/sir1994582/s6.01.html>.
- INCOME TAX ASSESSMENT ACT 1997 – SECT 307.80 When a superannuation income stream is in the retirement phase 2023, Austlii.edu.au, viewed 20 August 2023, <http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s307.80.html>