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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.


Jay Wickramanayake
February 05, 2022

Hi Meg
Thanks for your insight into SMSF pensions/accumulations and it has raised a concern for our SMSF pensions.
We have a SMSF from which we (me and my wife) are currently drawing account-based pensions (both of our super pension balances are less than $1,600,000 separately (when we started the pensions the balances were less than that amount separately for both of us). We plan to rollover most of the pensions to two industry funds this year. My understanding is that we can do the rollovers without commuting the SMSF pensions. It would be great if you could please confirm whether my thinking on this is correct. Thanks in advance. Jay

Meg Heffron
February 15, 2022

Hi Jay, technically any rollover of a pension involves a commutation (to stop the pension) followed by a payment to another fund (the rollover). However, the rollover amount doesn't have to be paid out to you first as a lump sum benefit, it can definitely be paid over to the new fund directly. The fact that the pension is technically being commuted does have some ramifications. For example, anyone who fully commutes a pension has to pay it up to date first (so someone doing it about now, would have to make sure they've drawn roughly 8/12ths of the year's pension payments). The pension in your new fund will also be a new pension. That causes problems for some people who have the Commonwealth Seniors Health Card, for example. People whose pensions started before 1 Jan 2015, for instance, can ignore their pensions when it comes to the income test for this card. But a new pension starting after money has been rolled over to a new fund will count for this test because it is a brand new pension.

Jay Wickramanayake
March 26, 2022

Hi Meg
Thanks for your reply and it is a great help. Very much appreciated.

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?

Meg Heffron
February 15, 2022

Actually Kevin, taking a lump sum from your pension doesn't compromise the grandfathering. What's important is whether the pension itself has been continuously in place since before 1 Jan 2015, but it's OK to have taken pension payments and lump sums from it along the way. In contrast, doing something like stopping and restarting it (for example, as part of moving it from one fund to another or combining it with some / all of an accumulation account) would definitely mean the grandfathering would be lost. Check out this article :

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?


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