Nick Bruining Q+A: Am I better off drawing a lump sum from my super each year?

Question

I’m about to retire aged 67 with $1.2 million in a West State Super account. Am I better off drawing a lump sum each year from the super fund, or transferring the money to a RI allocated pension — which converts super into a regular income — and then drawing a yearly amount from this account?

Answer

Congratulations and there are a few issues to consider.

Both scenarios are viable, although you are likely to incur unnecessary tax if you take option one as described.

West State Super is a now closed-to-new-entrants scheme for State Government employees. It operates under a unique set of taxation laws based on the Australian Constitution where the Commonwealth Government cannot impose taxes on State Governments.

Goldstate and West State both operate under a West Australian Parliamentary Act and therefore, are known as “constitutionally protected, untaxed schemes”.

While you are a member, no tax on the earnings within the fund is deducted. A “normal” taxed superannuation scheme pays 15 per cent tax on earnings within the fund.

While the no-tax returns of West State are fortunate, they distort the returns generated by the fund, giving members the impression that investment returns are superior to other superannuation funds. That is not the case.

Net of tax, West State’s returns are often in line with many other funds. However, maintaining the higher untaxed balance means in monetary terms, the annual dollar return may be higher.

Unfortunately, all of the tax exemptions end when, as an individual taxpayer, you decide to access the money. It becomes taxable income as soon as it leaves the fund. A superannuation benefit normally includes two taxable components.

The tax-free component is exactly that, tax free on exit and whenever it is accessed. The tax-free component usually includes non-concessional contributions made by you, government co-contributions and super downsizer contributions.

The remaining amount in the fund is classified as “taxable”. That in turn would be either untaxed — as is the case with West and Gold State — and taxed, which is the case with almost every other fund.

Through rebates and offsets, the tax payable on the untaxed part is 15 per cent. However, receiving it directly from the fund as assessable income in your hand, also means you will be liable for the 2 per cent Medicare levy on the gross taxable component.

You can’t select which component to withdraw from. Any payment from super is proportionally allocated to the untaxed and taxable components.

Your first option would be to roll-over the benefit to a conventional taxed fund. In this process, the 15 per cent “exit” tax will still be paid, but you will avoid the 2 per cent Medicare levy.

A worst case scenario would see the entire $1.2m subject to tax, leaving you with a net amount in your new super fund of about $1.02m.

You will have saved up to $24,000 in Medicare levy by rolling over first. Because you are over 60, no tax is payable on any subsequent withdrawals you make from the “new” fund.

You could also move that into an account-based pension fund. The benefit of doing this is that you will move it back into a tax free environment as no tax is payable on retirement phase superannuation.

The only significant issue here is that you are compelled to take out a minimum amount each year. The minimum amount is a percentage of the June 30 account balance and increases with age.

At this stage and up to 75, the minimum amount will be 5 per cent per annum. As you age, it increases in steps until, hopefully, you reach 95, where it becomes 14 per cent of the account balance.

There is no upper limit to the amount you can access either as a regular payment or as a lump sum. You should not limit your choices to any particular fund when selecting a roll-over fund or an ABP. There are many excellent low cost funds as alternatives to the RI ABP.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association