SMSF Technical Education & Strategies

Lump sum or pension ?

Once your eligible to start receiving a benefit from your SMSF (i.e. you've satisfied a condition of release), you have two two basic choices:

1. Withdraw money as a lump sum; or

2. Commence a pension from the fund;

Or as happens in most cases, a combination of the two.

The decision of whether to take a lump sum or a pension from your SMSF benefits is mainly an issue of what your needs are, and taxation. Lump sum withdrawals, depending on the components of your SMSF account and if your under age 60, might be subject to ‘lump sum’ tax.

Further to this, if your in retirement your generally using this capital to provide an income for yourself, so if you invest this capital outside of super, the income will be subject to normal marginal tax rates. If your over age 60 and instead start a SMSF pension, then this income stream is tax free in your hands. Further to this, the income within the fund from pension assets is exempt from income tax.

The main advantages of taking a pension instead of a lump sum from a SMSF include:

- defer lump sum tax (if under age 60)

- tax free income streams (over age 60) instead of paying marginal tax rates if the capital is invested outside of your SMSF

- keep the asset protection of a SMSF

- the pension receives a favorable assessment under the Centrelink income test.

The main disadvantage is that you need to pay annual administration and audit fees for the SMSF structure each year. If these fees are higher than any other financial benefit your receiving from having the SMSF pension compared to holding your investments in your own name, then it may not be worth keeping it going. You need to do the numbers and find out.

The most common scenario is for many SMSF members to start an account based pension for the reasons mentioned above, and to then take out small lump sums when they have a need for a larger capital outlay (e.g. upgrading a car etc).