The dangers of extra super withdrawal

Making extra withdrawals from superannuation every year could still cause problems for members, according Bob Locke from SMSF specialist Practical Systems Super, despite there not being a maximum withdrawal amount.

While members must drawdown a minimum amount from their super each year, the way additional payments were taken could have significant implications.

Say a super member chose to take an additional pension amount of $200,000 from their retirement phase pension account, then the transfer balance cap would remain the same. When they contributed the $200,000, it would have to remain in accumulation phase and the related portion of income and capital gains derived from that portion will be subject to ongoing tax. 

Alternatively, if they commute $200,000 of their retirement phase pension account back to accumulation phase and withdraw a lump sum, the transfer balance cap will reduce by $200,000. When the amount is recontributed, a further retirement phase pension can then be started so the entire fund is exempt from tax on all income and capital gains.

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Locke said the difference between two methods highlighted opting for pension commutations could have a beneficial effect on finances.

“The takeout here is that where contemplating any significant additional pension withdrawals (beyond the minimum requirement), you would generally be wise to arrange these as a commutation back to retirement phase and then make a lump sum withdrawal.

“Note there are reporting obligations in relation to pension commutations and you should consider seeking professional advice where appropriate.”