Just because you’ve reached what’s called your preservation age (from 55 to 60 depending on when you were born) isn’t enough in itself to qualify you for access to your super. You also need to make sure you fulfil a condition of release, such as retiring from your job or turning 65.
Once you have access to your super, depending on the rules of your fund, the Australian Taxation Office (ATO) says you may be able to withdraw some or all of your entire super savings as a lump sum. But just because you can doesn’t mean you should.
So long as the money stays in your super fund it will normally continue to be invested in order to seek a return, hopefully further increasing your savings.
Depending on your circumstances, it may be better for you to withdraw only what you need and leave the rest to grow.
Of course, that all depends on your situation, so it’s a good idea to make sure you consider your financial needs now and in the future, and seek some independent advice.
How much will you be taxed on any lump sum withdrawal?
If you do decide to withdraw a lump sum, you should also be aware of the potential tax implications of doing so. While super is taxed favourably, it’s not entirely tax-free.
Your super nest egg may include both tax-free and taxable elements, depending on what contributions were added to your account. Further complicating things, the taxable portion could have its tax paid while in your fund, or it could be taxed when you withdraw it.
The tax-free portion of your super will come from any non-concessional contributions – those made from your savings or take-home pay that has already been taxed – as long as you don’t claim a tax deduction for those contributions.
The taxable portion will usually make up the bulk of your super account balance. This includes any super guarantee contributions from your employer, any salary sacrifice contributions you made and any contributions you claimed a tax deduction on.
If your fund has already paid the 15% tax on the taxable portion of your super, it is called the taxed element. Otherwise, if you must pay the tax it is known as the untaxed element.
The exact proportions of taxed, untaxed and tax-free super you have is determined by your super fund when you make a withdrawal. The ATO says whatever you withdraw will be made up of the same proportion – you cannot choose to take from only one element.
The amount you pay in tax on each element of a lump sum super withdrawal will be based on your age and will vary depending if you’re at or above preservation age and under 60, or if you’re aged 60 and over. If you’ve reached your preservation age but haven’t turned 60 yet, the tax you pay may also depend on how much you withdraw.
The government’s Moneysmart website says you generally won’t pay tax on a lump sum withdrawal if you’re aged 60 or over, but you may pay tax if your super fund is untaxed, as is the case for some public sector funds.
The ATO says your super fund will send you a payment summary showing the components of your lump sum withdrawal. It advises that you’ll need to include the untaxed element in your tax return for the applicable year, but not the taxed element or the tax-free component.
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