Should I take my super as a lump sum or not?

When it comes to accessing your super, it’s important you make the right choice.

You’ve spent your working life accumulating super. So when the time comes, are you better off taking a lump sum, regular income or both?

Let’s weigh up the alternatives so you can start to consider what may be best for you.

Taking a lump sum

If your super has been managed on your behalf during your working years it can be tempting to take the lot when you can. But make sure you weigh up the upsides and downsides before deciding:

• Think long term
  A lump sum in your hands means you can spend it as you wish. For example, paying off the mortgage may be a good financial decision. But if it will mean you have no super left, what will you live on?

It’s easy to spend a lump sum quickly so think ahead because in retirement a bad decision can be financially impossible to recover from. Work out how you can support yourself when you’re no longer working.

• Will the tax office take a chunk?
  When it comes to taking a lump sum, look into tax rules—if you’re under age 60 you may create a tax liability, which would eat into the money you’ll need for retirement.
• Are you confident making your own investment decisions?
  Sound investment plans may help you avoid relying on the government pension down the track. Evaluate your investment knowledge and the effort you’re prepared to put in―do you feel confident in your ability to invest your money to achieve the returns you need or will you need help?

Keeping your money in super

Sure, keeping your money in super can be one of the most tax-effective options. But there are other considerations as well, as you’ll see below.

• Make the most of tax benefits

By starting a pension in superannuation your money is not exposed to the tax rules that apply to money held outside super:

• No tax is applied to your investment earnings in your super pension
• No tax is applied to your income drawn from age 60
• Tax offsets of 15% are applied to the tax payable[1] on your pension you draw if you’re aged 55-59, which means in the lead-up to turning 60, 15% of your taxable income is effectively tax-free.
• Investment control and earnings

You can generally choose from a range of pre-set investment options in super. But an investment manager makes the day-to-day investment decisions, so overall you have less control.

Your balance will increase if earnings are added to your account. Although investment earnings and your balance can fluctuate depending on investment markets―there’s no guarantee your super will last as long as you do.

• Access your money

You can take a portion or your entire super balance as a lump sum, or draw out a regular income―it’s up to you.

Each year you have to withdraw minimum amounts depending on your age―eg you’d need to take out at least 4% each year up to age 65 and then 5% until you turn 75. And just remember, if you choose to withdraw all your money out of your super account, you may not be able to put it back in, as there are rules and limits on how much you can put back in (particularly if you are over age 65).

Best of both worlds

There’s a lot to weigh up when deciding how you’ll use your super. On one hand a lump sum can give you flexibility and control. But so can drawing out an income. Deciding between the two can be challenging, but you don’t have to choose one over the other.

There is a lot to consider, so it’s probably a good idea to meet with your financial adviser to determine what’ll work best for you. Find out how changing your approach as you get older could help you benefit from tax rules.

[1] The taxable portion of your account-based pension will be taxed at your marginal tax rate.