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How much can I withdraw as a lump sum from my superannuation fund when under 60 years of age?

February 24, 2012

Gavin Martin of Cornerstone Wealth answers the question:

“I am 58 years old this year. I will cease full time work mid year and would like to access my superannuation balance of approximately $200k in order to pay off the mortgage on an investment property. What percentage could I withdraw as a lump sum?”

Disclaimer


This information does not constitute financial product advice as it does not take into account your personal circumstances. Therefore you should not make any financial decision based on this information. You should consider obtaining independent advice before making any financial decisions.

View full transcript [spoiler]


Hi I’m Gavin Martin, and today I’m going to answer a question about withdrawing a lump sum from your superannuation balance, under the age of 60, before I do it is important to acknowledge that this information does not constitute financial product advice as it does not take into account your personal circumstances. Therefore you should not make any financial decision based on this information. You should consider obtaining independent advice before making any financial decisions.

So the question I’m addressing today is, I am 58 years of age this year, I will cease full time work mid year and would like to access my superannuation balance of approximately $200k in order to pay off the mortgage on an investment property. What percentage could I withdraw as a lump sum?

Firstly you need to understand if you have reached your preservation age. If you are born before 1st July 1960 you have a preservation age of 55 years of age, so someone currently in 2012 who is 58 they were born before 1960 and therefore have reached their preservation age.

The second thing that you need to do is understand if you have satisfied a condition of release. For somebody under the 60 years of age, when they cease full time employment and declare that they did not intend to return to the workforce that satisfies a condition of release.

So the next question is if you have reached your preservation age and satisfied a condition of release and are under 60 years of age, how much can I withdraw from superannuation?

Well it is a very simple answer, you can withdraw as much as you like but there are possible tax implications, so we’re going to, in the remainder of the session deal with the tax implications of withdrawing lump sum balances from your superannuation under the age of 60.

So how do you work out how much tax is payable on a lump sum withdrawal from superannuation when less than 60 years of age?


Well it depends on the lifetime limit of that financial year and the tax components of the fund.

So what is the lifetime withdrawal limit for lump sum superannuation withdrawals when under 60 years of age?

Well during the 2011/12 financial year the lifetime withdrawal limit is $165,000.


So a lump sum withdrawal less than $165,000 is likely to be totally tax free. That’s a lifetime limit, so if you have made other lump sum withdrawals before this one then you need to add those to that balances as well. The $165,000 only applies to the taxable components because the other components come to you tax free.


The other thing to note is that the $165,000 lifetime limit is generally indexed up each financial year in $5,000 increments. So next financial year it might be a $170,000 I’m not sure of that figure as yet, they announce it each year.


So if I withdraw more than $165,000 from my super when under 60 year of age, how much tax will I pay? That’s the next question isn’t it? Well it depends on the tax components of your fund. So tax free components come to you tax free, you don’t pay tax in it. But taxable components under the lifetime limit, they come to you tax free as well as we just talk about will during the 2011/12 that lifetime is a $165, 000. But the amounts over the $165,000 over that lifetime limit are taxed at 16.5%.


How do you work what your taxed and tax free component are?


Most funds these days have online access and you can check out both what your preservation details are and what your tax components are. If we look here with this particular online statement, what I have asked for is the benefit quote. So they’re quoting me what the details of my funds are if I try to withdraw them.


Here we’ve got a preserved amount of $1,000. That means that I can actually withdraw the money, if I got some unrestricted non-preserved money then I can actually withdraw. This is what we are talking about with reaching your preservation age and satisfying a condition of release. What would happen is that your fund would moved from being preserved and restricted non-preserved to unrestricted non-preserved which means you can then withdraw lump sums. That’s really talking about your preservation age and condition of released that we’ve already addressed.


What I’m wanting to explain here now is the tax components of the fund, so we are assuming that the fund, the super fund that we’re dealing with here is a taxed fund, now there are some fund that are untaxed we are not dealing with that question at all. So if your fund is a taxed fund, generally your balance is made up of two components and here the tax, sorry the balance of a $1,000 is made up of all taxed components, a $1,000 of taxed components, now you might have some of a tax free components from contribution that you made to your fund personal contribution or you have made, may have made, a $1,000 government co-contribution as well, so you may have put $1,000 in to try and get $1,000 from the government under the co-contribution scheme. You might have some tax free components in there as well.


To understand how much tax you pay on withdrawal you need to know what the components are; taxed versus tax free. We are going to walk through a couple of different example of that.

Example 1


We have got a $200,000 balance in our superannuation fund and the tax components are, tax free amount of $35,000 taxable component of a $165,000. So because the taxable component does not exceed the lifetime limit of $165,000 no tax is payable on the lump sum withdrawal. Pretty simple. Because you do not pay any tax on these tax free components and the taxable component does not exceed the lifetime limit there is no tax payable in this example.


Example 2


We’ve got different components. We have got no tax free component in our $200,000 balance this time around. We have got taxable components of $200,000 so in this case we have exceeded, because the taxable components exceeded the lifetime limit of $165,000 by $35,000, then tax of $5,775 which is 16.5% of a $35,000 exceeded amount, is payable on the lump sum withdrawal. Your net benefit is of withdrawing of $200,000 in this scenario is a $194,225 because we have paid that $5,775 in tax on withdrawal.


Example 3


Let’s look at our final example, so example 3 is where we have got a $200,000 balance again but the tax free component is $16, 500 and the taxable component is $183,500. Because the taxable component exceeds the lifetime limit of $165,000 by $18,500, then the tax payable in withdrawal of the full $200,000 is $3,052.50 (i.e. 16.5% of $18,500). The resulting benefit is $196,947.50 rather than the full $200,000. In this scenario we could actually do potentially do some other things to get that full $200,000 without paying the $3,052.50 in tax. Let’s look at this alternate strategy.


Example 3 Alternate Strategy


We have got the same components $200,000, $16,500 tax free and $183,500 taxable component


What we could do if we had a low or no taxable income is we could commence a pension with the full $200,000 and withdraw $20,000 from it, so we could withdraw a pension of $20,000. Now that $20,000 if we have got a low or no taxable income should come to us tax free, so what we end up with under this scenario is $180,000 in our superannuation fund or a pension fund, and we have got $20,000 in our bank account that we haven’t had to pay tax on and the components are because the components are drawn down in equal proportion, tax free component of $15,000 and the taxable component of $165,000 bringing us to the total amount of $180,000.


Now if you withdraw a lump sum amount of the $180,000 because the taxable component does not exceed the lifetime limit of $165,000 no tax is payable on this remaining lump sum withdrawal of $180,000 resulting in a full benefit of $200,000. We have done it in two different ways. We have withdrawn $20,000 in the form of a pension because we have got a low taxable income. We don’t pay tax on that. We have done the lump sum withdrawal of $180,000 and stayed under the lifetime limit of $165,000. We have been able to access the full $200,000 without paying any tax.


The other way to insure that you don’t pay tax on lump sum withdrawals is you could wait until you turn 60 years of age because withdrawals at that stage are also not taxable at all.


There’s the answer to your question. Sounds like a simple question but there are some implications depending on what particular scenario is.


If you have a question yourself, a financial question, then I would really love it if you called in. If you are with Australia call 1300 275 428 and leave a voice mail that I’ll answer for you either via the video, similar to this, or by my podcast. If you are outside of Australia and you’ve got a financial question then you need to call our country code +61 39642 2268 select option 1 again, leave a voice mail question and I’ll answer it as part of a podcast and/or a video.


If you want other information then feel free to go on my website www.cornerstonewealth.com.au


I hope that it really helps you.

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Other links

When can you access your Superannuation?


How can you access your Superannuation?