Retirement withdrawal – lump sum or income stream

The difference between a lump sum withdrawal of super and a retirement income stream and their tax consequences.

Super withdrawal options

When you meet the retirement condition of release, you can usually choose to withdraw your super as either a:

• super lump sum
• super income stream
• combination of both.

The super withdrawal option you choose may affect the:

• tax you pay (including tax on investment earnings)
• amount of money you have for your retirement.

Pensions and other benefits

If your super benefits won’t fully support you when you retire, you may also qualify for Australian Government support, such as age or service pensions or benefits.

If you’re retired or have turned 60, you may be eligible for tax offsets. This will depend on your income and assets, where your income comes from, and whether you’re fully or partly retired.

The relevant offsets are the:

• seniors and pensioners tax offset (only available if you qualify for the age pension)
• lump sum tax offset
• super income stream tax offset

Other offsets you may be eligible for include:

• tax offset for super contributions on behalf of your spouse
• low- and middle-income earner tax offsets

Super income stream tax offset

A super income stream is a series of regular payments from your super fund. If you receive income from an Australian super income stream, you may be eligible for a tax offset equal to:

• 15% of the taxed element
• 10% of the untaxed element.

The tax offset amount available to you on your taxed element will be shown on your PAYG payment summary – superannuation income stream.

The tax offset amount you can claim on your untaxed element won’t be shown on your payment summary and is subject to a maximum (cap).

You can’t claim a tax offset for the taxed element of any super income stream you receive before you reach your preservation age, except where the super income stream is either a:

• disability super benefit
• death benefit income stream.

You can’t claim a tax offset for the untaxed element of any super income stream you receive before you turn 60 years old, unless both the following apply. The:

• super income stream is a death benefit income stream
• deceased died after they turned 60 years old.

Super lump sum

If your super fund allows it, you may be able to withdraw some or all of your super in one or more ‘lump sum’ payments. However, if you ask your fund to make regular payments from your super it may be an income stream.

Once you take a lump sum out of your super, it is no longer considered to be super. If you invest the money, earnings on those investments are:

• not taxed as super
• may need to be declared in your tax return.

Super income stream

A super income stream involves a series of regular payments from your super fund which are paid at least annually.

Your super income stream may be either:

• an account-based super income stream including
  • regular payments from a retirement phase account
  • a transition to retirement income stream
  • a market-linked pension that started on or after 1 July 2017

• a capped defined benefit income stream including
  • a lifetime pension, regardless of when it started
  • a lifetime annuity, life expectancy pension or annuity, or market-linked pension or annuity that existed before 1 July 2017

• an innovative retirement income stream
  • a deferred lifetime product that did not meet the annuity and pension standards before 1 July 2017.

Super income streams (also known as pensions or annuities) are a popular option for retirees because they help you manage your income and spending. Depending on your circumstances, income streams may also have tax advantages.

If you have any questions, feel free to ask them in the comment section. We will be happy to answer all your queries.