Withdrawing lump sum payments before 60

Summary: Understanding the rules around accessing super, and in-house assets concessions.

Key take-out: Individuals aged under 60, who have met a condition of release, can pull out lump sum amounts under the low-rate cap limit. Separately, individuals wanting to invest super funds into a loan offset account will run into problems. But there are some other alternatives.

Question: I am 56 and plan to retire in August 2018. As my preservation age is 56, at what date can I commence to withdraw tax-free from my SMSF in pension mode? I believe I can make a tax-free lump sum withdrawal up to $200,000 under the low-rate cap limit. Does this need to be one lump sum, or can I make that say in three withdrawals over three years until I reach 60?

Answer: Under the retirement condition of release, which you will have already met as a result of retiring and working less than 10 hours a week, superannuation pension and lump sum payments are tax-free for someone who is 60 or older.

For someone between preservation age and 60, lump sums up to the $200,000 low-rate cap can be withdrawn tax-free, with amounts over the low-rate cap being taxed at 15 per cent. Superannuation pensions, paid from taxable superannuation benefits, are taxable for someone under 60, but a 15 per cent tax offset is received.

Unlike the limit placed on lump sum payouts under the severe financial hardship condition of release, there are no limits on the number of lump sum payments that a person can take under the retirement condition of release.

This means you could take a series of lump sum payments from your superannuation until you turn 60 of up to the $200,000 limit. If, over the next three years the low-rate cap increases to say $215,000, you could take tax-free lump sums up to that increased limit.

You should get professional advice before taking any action, as you have access to the strategy of taking out a tax-free lump sum of $200,000, and recontributing this as a non-concessional super contribution. This would result in the tax-free component of your superannuation increasing. There is no tax payable by someone aged under 60 on the tax-free component of a superannuation pension payment.

If your superannuation was currently $1,000,000, which is totally made up of taxable superannuation benefits, this would result in 20 per cent of your superannuation benefits being tax-free. This would mean the income earned by your SMSF to fund your pension would not be taxed and, after taking into account the tax-free percentage and the tax offset, you would more than likely not be paying tax on the superannuation pension benefits you receive.

Question: My wife is 64 and I am 65. We are both retired and not likely to work again, have $1.3 million in pension phase and no assets outside of super other than the family home. We need $300,000 to fund improvements to our home. Rather than taking out the $300,000 via commutation or pension payments, can the SMSF invest $300,000 in an offset account that will reduce the interest on a $300,000 bank loan? I expect to inherit $250,000 sometime in the next five years that will pay off the residual loan principal. We are unlikely to qualify for future super contributions.

Answer: You could not take $300,000 from your SMSF and invest it in a mortgage offset account. This is because one of the restrictions on an SMSF is that investments must be purchased and maintained at arms-length. As the mortgage offset account would be linked to a mortgage in your name, this would not be at arms-length.

You should seek professional advice as there may be an opportunity, under the in-house assets concession, of taking a loan from your SMSF that could be placed in a mortgage offset account.

Under the investment rules an SMSF can have in-house assets of up to, but no more than, 5 per cent of the total assets of the fund. Loans to members of a fund are regarded as an in-house asset and, based on your super fund being worth $1.3 million, you could take $65,000 and deposit this in a mortgage offset account.

You should also consider taking out the $300,000 on an interest-only loan, where the majority of it could be repaid when you receive your inheritance.