Once you hit retirement, your superannuation is yours to use how you want. But with great power comes great responsibility. While it may be tempting to use the money to go on that big holiday you have been dreaming of, there are some things to consider before taking a lump sum from your super.   

You can access your super when you:  

• Reach your preservation age and retire. 

• Reach your preservation age and choose to begin a transition to a retirement income stream while you are still working. 

• Are 65 years old (even if you have not retired).  

Generally, once you retire, you have three options for what you can do with your super balance:   

• Withdraw it.   

• Leave it in the accumulation phase in your super account.  

• Move it into the retirement or pension phase (there is a 1.7 million transfer balance cap, so if your super exceeds this, some will have to remain in the accumulation phase).   

If you’ve chosen to leave your super in the accumulation phase, you won’t receive a regular income stream from your account. This may be a preferable option if you are still employed in some capacity, have a rental income or dividends from investments that cover expenses, receive the Age Pension or just want to continue accessing insurance through super.  

In accumulation, all investment earnings are taxed a flat 15%, whereas retirement phase earnings and withdrawals are fully tax-free. If you pass away while your super is in the accumulation phase and it is inherited by a non-dependent, they will be taxed at 15% for any taxed component (plus Medicare levy) and 30% for any untaxed component (plus Medicare levy). If you pass away with super in the retirement phase, they will be taxed at their marginal tax rate but receive a 15% tax offset.   

So, can you withdraw from super in the accumulation phase for a major purchase? In many cases, yes. If you meet the condition of release, you can apply for a lump sum to make a major purchase.   

Once you move your super to a pension or retirement phase, any earnings you make from investments in your super are tax-free. You can make regular withdrawals from your super to fund your expenses. This can be set up as fortnightly, monthly, quarterly or half-yearly payments. You can also choose to withdraw lump sums as needed for large expenses.  

Once you start a super pension account, you must withdraw a minimum amount each year to continue receiving the tax-free status, even if your expenses are below the minimum pension rate.   

With this in mind, it may be beneficial to withdraw a lump sum to pay for a major purchase to meet that threshold.   

If you withdraw more than your super is earning, your super will deplete and could run out sooner than you’d planned. It is important to keep this in mind.   

Super pension accounts are also deemed Age Pension purposes and could reduce or cut off any Age Pension entitlements.   

Of course, you can choose the option of withdrawing your super completely and putting it into a bank account, however, this does have tax implications you’ll need to consider.  

Once it’s withdrawn, it is no longer considered super. If you invest it, any money you earn on those investments will not receive the same tax benefits as super and will need to be declared in your tax return. 

Once you reach the Age Pension age, your super will count towards both assets and income tests and is subject to deeming, regardless of whether you have transitioned to the pension phase or not. As a result, you’ll be assumed to be earning a certain rate of return on super, regardless of whether you do or not.  

Lump sum withdrawals, however, do not count as income for the income test, but what you do with those funds may be subject to the income and assets tests.   

If you use the funds to buy something that will generate income (an annuity or shares, for example) it will count towards your income test.   

Likewise, investing the lump sum into assets like purchasing an investment property, will be included in your assets test. Your primary place of residence, however, is exempt from Age Pension assets tests—so if you take a lump sum to pay off your mortgage or renovate your home, for example, your pension won’t be affected.   

Along similar lines, if you take a lump sum and add it to your bank account to pay for day-to-day living expenses or travel, for example, this will count towards your assets test.

It’s strongly recommended before you withdraw and spend a lump sum from your super to determine whether you’ll have enough remaining to live off during retirement (including potential medical or other issues that may come up).  

Most superannuation funds offer free financial advice to members of the fund, and they could help you better understand how much you could need over your lifetime and the potential impacts of withdrawing a lump sum over the long term.   

One thing to consider before using your super to pay for a major purchase is how it will impact your compound interest over the long term. The more you have in your super for longer, the more interest will compound over time.  

That’s not to say you shouldn’t consider doing it, super is there after all to help you fund your retirement, but the more you take, the less interest you will earn over the long term.   

It’s important to consider the impacts of the major purchase on your life. Is it going to increase your wealth? Is it solving an immediate problem you are facing? Is it going to help you live a better life over the long term?  

Some major purchases can actually help you increase your wealth over your lifetime. Making a lump sum withdrawal to renovate your home, for example, will likely add value to it.   

Purchasing a depreciating asset like a car, whitegoods, or home electronics won’t increase your wealth, but sometimes these purchases are necessary, particularly if it is replacing a failing   

For some, lump sum payments from super can be used in emergency situations, such as medical treatments. According to ABC News, Australians have used a collective 1.6 billion from their superannuation funds to pay for medical treatments in the past three years. This is almost 20 times higher than it was during 2010-2011.   

Honorary enterprise professor at the University of Melbourne Stephen Duckett told the ABC that the figures were highly concerning.  

"It is outrageous that Australians are taking $1.6 billion out of their super funds to pay for care that should be available relatively quickly in the public sector," he said.  

"Australia's Medicare system means people should not have to ride their savings to get the care they need. We should have a system where people can access elective procedures in a timely way, in the public or the private sector." 

Making a major purchase, whether you use super or not, is a significant financial decision that can have wide-ranging and long-lasting impacts, so it is a good idea to seek independent financial advice before jumping in. Many superannuation funds offer free financial advice to members. You can also explore the Moneysmart website’s resources on choosing a financial advisor.

For further reading: SuperGuide Source 1, SuperGuide Source 2, Choice