Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 434

Tips when taking large withdrawals from super

I recently talked to a client about taking a large benefit (withdrawal) from their SMSF. Believe it or not, there’s a lot to consider in working out how to structure the payment.

Just taking a very large pension amount is often the worst possible thing to do.

What are the alternatives?

It’s easiest to explain the thought process using an example. Consider a couple where John (age 70) has a pension worth $1.65 million that he started several years ago. At the time he fully used up the limit that can be converted to a super pension ($1.6 million at that time). John had a very large super balance so he had super money left over that he left accumulating in his fund. That account (often referred to as an ‘accumulation balance’) is now worth $500,000.

His wife Julie (age 71) also has a pension that’s currently worth $1.65 million but no accumulation balance. In both cases, as they used their $1.6 million limit in full when they first started their pensions, they didn’t get an increase when the general limit was increased to $1.7 million from 1 July 2021.

They’ve always taken the minimum pension in the past (and have done so this year already) but now want to withdraw an extra $400,000 in 2021/22. What should they do? Fortunately, they are both over 65 and so have complete flexibility as to which account they take the extra payment from.

As a pension fund, their SMSF is entitled to a tax exemption on a lot of its investment income. Currently, around 87% of the fund’s capital gains, rent, dividends, interest, managed fund distributions etc is treated as exempt from tax. In practical terms, John and Julie’s fund usually receives a tax refund, thanks to their franking credits. The ‘87%’ is calculated by me as the fund’s actuary each year. I work out what proportion of their fund ‘belongs’ to their two pension accounts. If the pension accounts make up around 87% of the total fund over the year, then 87% (the ‘actuarial percentage’) of the investment income is exempt from tax.

Where to take the payment from

These tax rules make it much more attractive to take their large payment from John’s accumulation account rather than either of their pension accounts. It means that in future years, the proportion of fund income that will be exempt from tax will be closer to 97%. In contrast, if they took this big payment from their pension accounts, the percentage would be 85%.

Would things be any different if Julie also had an accumulation account?

In some ways, yes, as they would need to decide whether to take some of this payment from her accumulation account as well. The main factor to weigh up is the relative sizes. If John’s accumulation account is much bigger, it’s generally better to take it from his, and vice versa. If they are about the same, split the payment between them to even up their accumulation balances.

This is driven by what happens when one of them dies. In Julie’s case, if John died, she may want to leave as much as possible of his super in their SMSF. But she can only do this if she is able to receive it as a pension. Her challenge is that there is a cap on how much she can convert to a pension ($1.6 million), inherited super counts towards this cap and she’s already used it anyway by starting her own pension.

To some degree we can manage this. We can switch off (‘fully commute’) her own pension which will mean $1.65 million is ‘reversed out’ of the amounts that count towards her $1.6 million cap. She can fill that space with up to $1.65 million from John’s super. But anything else in John’s super will have to be paid out of the fund. It would have been better for Julie if some or all of John’s accumulation balance had actually been in her name. She can leave her own super just accumulating in the fund but not John’s.

Since we never know who is going to die first, keeping the accumulation accounts roughly equal hedges our bets.

What about next time?

What if John’s accumulation account eventually gets down to zero and they have another need for an extra payment?

Then the money will need to come from one or both of their pensions. But even then, there is a better answer than just a large pension payment.

They should consider a ‘partial commutation’. Partial commutations feel the same as a pension payment to anyone who receives one but with an important difference: a partial commutation ‘gives back’ some of the $1.6 million pension cap that has already been used up whereas a very large pension payment does not.

Let’s imagine, for example, that sometime in the future John takes a partial commutation of $200,000 from his pension. He will then have an extra $200,000 ‘space’ in his pension cap. That could be really useful if (for example) he and Julie sell their home in the future and make special contributions known as ‘downsizer contributions’. He could convert $200,000 of his downsizer contribution into another pension. If he hadn’t created this space, the whole contribution would need to stay in an accumulation account.

It’s also useful in a scenario if Julie dies and he wants to leave as much as possible of her super in a pension that’s paid to him. Remember that inherited super counts towards the $1.6 million pension cap if it’s paid to the survivor as a pension. John can manage this by switching off some of his own pension to create ‘space’ to absorb a pension from Julie’s super. But the less he switches off the better. If he’s already created some space by taking partial commutations in the past, he’ll be able to leave more of his own pension in place.

Pensions are fantastic structures to have in place in an SMSF but the careful thinking about structuring doesn’t end when the pension starts.


Meg Heffron is the Managing Director of Heffron SMSF Solutions. This is general information only and it does not constitute any recommendation or advice. It does not consider any personal circumstances.


November 25, 2021

As I understand it a point that appears to be missing is that one still has to take out the minimum amount from the pension fund in that financial year in addition to whatever lump sum may be taken out of the accumulation fund. Also you have to be over 65 to be able to take the money out of the accumulation fund.

Meg Heffron
November 25, 2021

Thanks Fred, your point about taking out the minimum amount from the pension fund in that financial year in addition to whatever lump sum may be taken out of the accumulation fund is true and it’s a good point to make. I felt it was implicit that the person in the example had already met their pension payments via this sentence: "They’ve always taken the minimum pension in the past but now want to withdraw an extra $400,000 in 2021/22. What should they do?" While to me “an extra $400,000” sounds like “over and above the minimum pension” it’s not entirely clear. It could be reworded to say: They’ve always taken the minimum pension in the past (and have already done so this year) but now want to withdraw an extra $400,000 in 2021/22.” To your last point, you don’t have to be over 65 but your accumulation account does have to be unpreserved. I used the example of someone who was >65 as super is always unpreserved for anyone over 65. It’s almost always the case that someone who was able to start a retirement phase pension has at least some unpreserved accumulation balance. Hope this makes it clearer.

Leisa Bell
November 25, 2021

Hi Fred. Based on Meg's reply, edits have been made to the article to make this clearer.

November 22, 2021

Whilst it is a first world problem, i would be keen to see how this strategy could be integrated with a defined benefit pension arrangemnt that is greater than the $1.6/7 M limits. i am soon (12monoths away) from being eligible for the PSS pension and am looking at this situation and possible approaches. is there a suggested solution Megan? or as I started with....a first world problem....

Meg Heffron
November 30, 2021

Hi Justin - fortunately with defined benefit pensions that meet all the rules, you can go over the $1.6m / $1.7m limit but only with that pension. So the rest of your super will stay in your accumulation account. Given that your PSS pension is probably restrictive and won't allow you to take any extra money anyway, anything extra you need will have to be taken from your accumulation account which fits nicely with the above.

November 21, 2021

This is a great article Meg as it shows the importance of advice. A “simple” withdrawal always has a lot to consider. It is also important to look at the individual components of the individual accounts. The accumulation account might be all tax-free component. Whilst John and Julie are both alive proceeds go to each other tax free. When one passes away - the taxable component may be taxed at 17%. This becomes a large amount if tax if it isn’t dealt with whilst alive. I would also consider taxable components.

Meg Heffron
November 21, 2021

Totally agree Katrina. (I really needed a bigger word limit) You might even have multiple steps - if the accumulation account is all tax free but the pension is taxable, I expect you'd 1. take a partial commutation from the pension (so you withdraw taxable money) and 2. create a new pension with some of your accumulation account (which is tax free) to make sure you still have as much as possible in pension phase. Definitely tax components are very important. Thanks.

November 19, 2021

I am in pension phase and also have an accumulation amount because of the cap limit. I think if I took a lump sum from my pension, the grandfathered CSHC card I have would not be grandfathered anymore. Is this correct? Also if I took a lump sum withdrawal from my accumulation account it would not affect the grandfathering of the card as it is not interfering with the pension. Is this correct?

November 18, 2021

Notify your administrator in advance, not after the event. Not effective if notification is retrospective.

George Martin
November 18, 2021

Thanks, Meg, great tips here, save a lot of money by taking a withdrawal from accumulation rather than pension. So I can simply tell my administrator which one I want it marked against?


Leave a Comment:



Can your SMSF buy a retirement home for you now?

When the $1.6m cap is no longer relevant

What happens at death of an SMSF member?


Most viewed in recent weeks

Stop treating the family home as a retirement sacred cow

The way home ownership relates to retirement income is rated a 'D', as in Distortion, Decumulation and Denial. For many, their home is their largest asset but it's least likely to be used for retirement income.

Welcome to Firstlinks Edition 433 with weekend update

There’s this story about a group of US Air Force generals in World War II who try to figure out ways to protect fighter bombers (and their crew) by examining the location of bullet holes on returning planes. Mapping the location of these holes, the generals quickly come to the conclusion that the areas with the most holes should be prioritised for additional armour.

  • 11 November 2021

Welcome to Firstlinks Edition 431 with weekend update

House prices have risen at the fastest pace for 33 years, but what actually happened in 1988, and why is 2021 different? Here's a clue: the stockmarket crashed 50% between September and November 1987. Looking ahead, where did house prices head in the following years, 1989 to 1991?

  • 28 October 2021

Why has Australia slipped down the global super ranks?

Australia appears to be slipping from the pantheon of global superstar pension systems, with a recent report placing us sixth. A review of an earlier report, which had Australia in bronze position, points to some reasons why, and what might need to happen to regain our former glory.

How to help people with retirement spending decisions

Super funds will soon be required to offer retirement income strategies for members in decumulation. With uncertain returns, uncertain timelines, and different goals, it's possibly “the hardest, nastiest problem in finance".

Tips when taking large withdrawals from super

You want to take a lump sum from your super, but what's the best way? Should it come from you or your spouse, or the pension or accumulation account. There is a welcome flexibility to select the best outcome.

Latest Updates

Investment strategies

Charlie Munger and stock picks at the Sohn Conference

The Sohn Australia Conference brings together leading fund managers to chose their highest conviction stock in a 10-minute pitch. Here are their 2021 selections with Charlie Munger's wisdom as the star feature.


John Woods on diversification using asset allocation

All fund managers now claim to take ESG factors into account, but a multi-asset ethical fund will look quite different from a mainstream fund. Faced with low fixed income returns, alternatives have a bigger role.

SMSF strategies

Don't believe the SMSF statistics on investment allocation

The ATO's data on SMSF asset allocation is as much as 27 months out-of-date and categories such as cash and global investments are reported incorrectly. We should question the motives of some who quote the numbers.

Investment strategies

Highlights of reader tips for young investors

In this second part on the reader responses with advice to younger people, we have selected a dozen highlights, but there are so many quality contributions that a full list of comments is also attached.

Investment strategies

Four climate themes offer investors the next big thing

Climate-related companies will experience exponential growth driven by consumer demand and government action. Investors who identify the right companies will benefit from four themes which will last decades.

Investment strategies

Inflation remains transitory due to strong long-term trends

There is momentum to stop calling inflation 'transitory' but this overlooks deep-seated trends. A longer-term view will see companies like ARB, Reece, Macquarie Telecom and CSL more valuable in a decade.


Infrastructure and the road to recovery

Infrastructure assets experienced varying fortunes during the pandemic, from less travel at airports to strong activity in communications. On the road to recovery, what role does infrastructure play in a portfolio?


The three prices that everyone should worry about

Among the myriad of numbers that bombard us every day, three prices matter greatly to the world economy. Recent changes in these prices help to understand the potential for a global recovery and interest rates.



© 2021 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.