Taking your super: pension or lump sum?
Once you retire and can access your super, you have three broad choices: take it all as a lump sum, start a pension (an income stream), or do a mix of both. For most people, the right answer is a mix, but the reasons matter.
When you can access super
Generally when you reach your preservation age (60) and retire, or when you turn 65, whether or not you’ve stopped working. From 60, a transition to retirement pension lets you draw some of your super while you keep working, though earnings on it are still taxed at 15%.
Option 1: a lump sum
You withdraw some or all of your super as cash.
- Tax: from age 60, lump sums from a taxed fund are tax-free.
- For: clears a mortgage or other debt, pays for a car, renovation or travel, or helps family.
- Against: once it’s out of super, investment earnings are taxed in your own name, and money in the bank or used to pay off the home is treated differently for the Age Pension. It also needs managing so it lasts.
Option 2: an account-based pension
Your super stays invested in the fund (including an SMSF), and you draw regular payments from it.
- Tax: from age 60, payments are tax-free, and investment earnings on the money supporting the pension are tax-free in the fund, compared with up to 15% in accumulation. That’s the big advantage.
- Minimum payments: you must draw at least a minimum percentage each year, based on your age:
| Age at 1 July | Minimum drawdown |
|---|---|
| Under 65 | 4% |
| 65 – 74 | 5% |
| 75 – 79 | 6% |
| 80 – 84 | 7% |
| 85 – 89 | 9% |
| 90 – 94 | 11% |
| 95 and over | 14% |
- No maximum: you can draw more, or take extra lump sums, at any time.
- Against: the balance can run out, especially if markets fall early in retirement or you draw heavily.
The transfer balance cap
There’s a limit on how much you can move into the tax-free retirement phase over your lifetime: the transfer balance cap, which is $2 million from 1 July 2025 (your personal cap may be lower if you started a pension earlier). Anything above it can stay in super in accumulation, where earnings are taxed at up to 15%, or be withdrawn.
How the Age Pension fits in
Your super counts towards the Age Pension assets test, and from Age Pension age (67) it’s deemed to earn income under the income test, whether it’s in a pension or accumulation. Money spent on your home, which is exempt from the assets test, or on a holiday, isn’t counted. So how and when you draw down can change your Age Pension entitlement. A financial planner can model it.
A common approach
- Take a lump sum for specific needs: clearing debt, a car, home improvements, an emergency buffer.
- Start an account-based pension with the rest, for tax-free investment earnings and a regular income.
- Draw at least the minimum, plus what you need, and review it each year.
What happens when you die
Super doesn’t automatically form part of your estate. A binding death benefit nomination tells the trustee who to pay. A reversionary pension can continue to your spouse automatically. Death benefits paid to adult children who aren’t financially dependent can be taxed at up to 17% on the taxable component, which is worth planning for. See estate planning.
Get advice before you decide
The choice affects your tax, your Age Pension and how long your money lasts. Clarity Wealth’s financial planners can model the options, and if you have an SMSF, our Retirement package ($315 + GST a month) handles the pension paperwork and actuarial certificate. See also our retirement checklist.