Pension v Lump Sums

The Option of Pension or Lump Sum Withdrawals

All amounts that you withdraw, no matter if it is pension or lump sum in form, would never be charged any taxes on the condition that you are in the age range of above 60. If you are in the age range of 55 to 59, there are taxes that will be applicable to the lump sum or pension withdrawals that you will make. There are different circumstances that could dictate the differences in the rates of taxes that would be applicable on each scenario here.
Now, since there are significant differences in the taxation rates and rules that will apply to these scenarios, it would be best to treat your pension and lump sum withdrawals as the combination of both. Of course, this would be true if you are aged between 55 and 59 by this time. This is more advantageous than treating these things as a sole pension when you have already commenced the Simple Account Based Pension. Your papers will show that you are on a RETIRED status once you have commenced this Simple Account Based Pension. This is one of the main requirements in order to get access to these pension or lump sum withdrawals. Things would be different under a TRAP since these lump sum withdrawals are not allowed here and there is a limit of 10% on the pension that could be accessed by you as a member who hasn’t yet retired.

Now, the Super Benefit that you are trying to maintain and build up over time is actually composed of two basic components. These would be the taxable and the tax-free components. The taxable component is the amount that came from your concessional contributions that have been accumulated through all the years that you are a member of the SMSF. The tax-free component would be composed of the amounts that have been contributed through non-concessional ways. These would be the amounts that you have personally decided to contribute after your income has been taxed and you no longer claim a tax deduction from the SMSF.

These components are present in certain percentages on your account and this would be the basis of paying your withdrawn amounts. These amounts will be paid in proportion to the amounts of taxable and tax-free components of your Super Benefits. The whole practice is known in the finance and pension sector as the PROPORTIONING RULE. Under this rule, if you are aged between 55 and 59, your tax-free component withdrawal would never be charged taxes. However, the taxable component would be taxed at your marginal tax rate with a combined rebate of 15%.  The initial $180,000 that would be taken will never be charged taxes while the succeeding $180,000 would be taxed at a rate of 16.50%.

An Example:

You are aged 58 and at this time, your Super Benefit amounts to $1,000,000. This is composed of the following components:

Super Benefit Parts

Amount

Tax-Free Part

$800,000

Taxable Part

$200,000

TOTAL BENEFITS

$1,000,000

The table above shows that you super benefit is composed of 80% tax-free part ($800,000 divided by $1,000,000) and 20% ($200,000 divided by $1,000,000) that is taxable. If you will make a decision to get a simple account based pension by the 1st of July then you are required to access 4% of your total super benefits which would be equal to $40,000.

Now let us take the case wherein you have decided to access an amount of $150,000 from your SMSF. If this will be classified as a single pension withdrawal then you would have to pay a tax that amounts to $16,147! The $120,000 which is 80% of the $150,000 that you intend to access will be taxed $34,147.  Now, the tax rebate of 15% would be applied which will reduce the tax to the amount of $16,147.  Now if you will choose to access the minimum required amount of pension which is $40,000 and just withdraw the remaining amount as lump sum then the taxation scenario would be totally different.

To illustrate, the 80% of $40,000 would be $32,000 and this would be taxed $2,667.  If the 15% rebate would be applied here, the resulting rebate would be $4,800 which would then make the final tax payable a $0. If you have noticed, the rebate that was created also resulted to the loss of the refund. The good thing here is that the taxes have completely disappeared and you get to enjoy the full amount of the 80% as mentioned above.

Now, you can just go and withdraw the remaining $110,000 that you need. This is lump sum withdrawal. There are taxes that would apply here. However, you have to take note that this is your first time to access these amounts. The initial $180,000 is free from tax if you can still remember. Of course, since your $110,000 is below this amount, you will never have to pay taxes for it.

To sum it all up, your pension withdrawal of $40,000 has been completely freed from taxes and the same thing would be true for the $110,000 that you accessed through a lump sum withdrawal. The whole strategy just saved you $16,147 in taxes!