Can I Take a Lump Sum out of my SMSF?

Yes you can.

A lump sum payment can be paid to you from your SMSF member balance or as a death benefit lump sum.  It is simply a withdrawal from your SMSF which is usually a large one-off payment. It is not an SMSF pension payment per se which is defined as a number of periodic payments made to a member pursuant to a pension agreement.

SMSF superannuation benefits are not required to be paid out except when a member dies.

Generally, you are entitled to withdraw a lump sum payment from your SMSF member balance legally accessing your super balance when it is no longer restricted or preserved which occurs at the time you meet a condition of release.  However, access to super early is available under limited circumstances but the member’s balance generally continues to be restricted and preserved except for a member who has a terminal medical condition. Conditions of release include:

• reaching age 65
• reaching age 60 and permanently retired (not intending to work in the future)
• reaching age 60 and ceasing gainful employment (ceased a job which you were being paid to do for at least 10 hours per week)
• partial or full commutation of a pension account (transition to retirement pensions are excluded)
• early release of super i.e. compassionate grounds, severe financial hardship, terminal medical condition, release authorities, see the ATO website for details

If you are an eligible beneficiary, you may be entitled to withdraw a lump sum payment from your SMSF resulting from the death of a member as a:

• death benefit lump sum payment
• partial or full commutation of a death benefit pension

Hint – Check your trust deed as some older deeds do require superannuation benefits to be paid out when you turn 65 even though it is not required under the superannuation laws and regulations (SISA).

How can a lump sum withdrawal be made?

It can be paid:

• from the cash resources of the SMSF
• as an in-specie payment (subject to the fund’s trust deed)

An in-specie payment is paying out a lump sum payment in the form of a SMSF asset which is in lieu of a cash payment and can be shares, property, managed funds and units in a private unit trust.  Any such payment must be done at the current market value and the title legally transferred to the SMSF member.

Hint – an in-specie payment cannot be made if paying a lump sum payment due to compassionate grounds or severe financial hardship.

What is a commutation of a pension?

When an ABP is established a capital amount is set aside to fund it.  A commutation is the drawdown of the ABP which can be the total amount of the remaining pension account at a particular time or a partial commutation which is part of the remaining pension balance.

How is a lump sum payment made from a pension account different to a pension payment?

All withdrawals from a pension account are pension payments unless the member makes a formal request to the SMSF trustee prior to the payment being made that it should be classified as a lump sum payment.

A commutation of a pension is a lump sum payment which is taxed as a superannuation lump sum payment (SLSP). No tax is payable by a member aged 60 or over on a SLSP.

A commutation of a pension must be reported to the Australian Taxation Office (ATO) as part of the quarterly event-based reporting for SMSFs in a transfer balance account report (TBAR).

Hint – A person is limited to their personal transfer balance cap (PTBC) being the maximum amount they can have in pension mode (retirement phase) across all of their superannuation pension accounts.

Why would you choose to take a lump sum payment from a pension account?

Taking excess pension payments as a lump sum payment allows more room in a member’s pension cap which can be useful to convert future contributions and earnings to a new pension. Thus, maximising the amount in pension phase.

Taking a partial commutation from a member’s pension account and commencing a new pension from the member’s accumulation account can be very useful for estate planning purposes especially if the member has adult children by minimising the tax payable when a death benefit payment is made in the future.