What is the best super withdrawal strategy for funding your retirement? Lump Sum withdrawals or a regular income stream. There’s also another alternative that may provide members with the best of both worlds.
As you approach retirement, one of the most important decisions you'll need to make is how to access your superannuation. In Australia, you can withdraw your super as a lump sum, convert it into an income stream, or combine the two. Each approach offers distinct benefits and some trade-offs.
Your lifestyle during retirement, long-term financial security and tax obligations could be significantly impacted by the choice you make. In this article, we'll explore the pros and cons of each option and provide some guidance on which might be best for you.
Lump Sum Withdrawals
You can request as many lump sum withdrawals as you wish. Or you can even withdraw the full balance of your superannuation in one payment. If you choose to withdraw your super as a lump sum, you will receive a one-off payment for the amount you have requested.
Lump sum withdrawals are tax-free for people aged 60, who have met the condition of release, or those over 65 years of age.
Selecting this superannuation withdrawal option may be useful if you have high-interest debts you want to pay off, or you want to make an important high-value purchase, like buying a home.
Before you select the lump sum withdrawal option over commencing an income stream, consider the following.
Using the lump sum withdrawal method means you will still have a tax obligation for the income you earn on your superannuation investments. These earnings are taxed at are rate of 15%.
In addition, withdrawing large amounts up front could deplete your super faster than expected. This may leave you with lower or inadequate funds for the later years of your retirement.
You may also be thinking of investing your funds outside of superannuation. Understand that these investments might attract higher tax rates than those within the super system, especially if you buy and sell property or shares.
Income Stream Withdrawals
Should you select the income stream option, your superannuation will be converted into regular payments. These payments continue throughout your retirement.
The major advantage of opting for an income stream is that your investment returns in your superannuation are tax free.
Regular, smaller withdrawals may also help your retirement funds last longer.
The amount you can transfer to a retirement-phase or income stream account is capped at $1.9 million. Referred to as the transfer balance cap.
Combining Lump Sum and Income Stream Withdrawals
You don't have to take an either-or approach with your retirement income. You are also able to use a combination of the above options.
Accessing only a portion of your super as a lump sum could give you funds for planned expenses. For example, paying for a holiday or medical bills. While leaving the remainder of your superannuation funds in an income stream for stable, long-term tax-free income and investment returns.
It’s important to remember that your funds will still be invested according to the strategy selected in your superannuation fund and may therefore not be readily available if needed for an emergency.
How can ABA Advice Beyond Accounting help me choose the best super withdrawal strategy for my retirement?
The short answer is the choice between lump sum withdrawals, an income stream or combination of the options depends on your financial goals and lifestyle. You will need to consider both your short-term and long-term needs when making your decision. Consulting with a financial adviser can help you set the best strategy for your unique circumstances.
Our specialist SMSF accountants can work out the tax implications for your decisions and advise you on what would be the most tax-effective options to consider in relation to your strategy. Reach out to book a meeting and keep your superannuation tax strategy on track!
Important note on Superannuation and SMSF Investment Advice
ABA Advice Beyond Accounting are not financial advisers and cannot offer financial or investment advice on your superannuation fund or SMSF investments. ABA always recommend you seek investment advice from a licensed Financial Adviser and can recommend a Financial Adviser if you don’t already have one.