When you retire and access your superannuation, you have a choice: take your super as a lump sum, convert it to a pension income stream (account-based pension), or a combination of both. Each approach has different tax, Centrelink, flexibility, and longevity implications.
Option 1: Lump Sum Withdrawal
Taking your entire super balance as a cash lump sum at retirement.
Tax on lump sum withdrawal
Age 60 or over: Super lump sum withdrawals from a taxed fund are generally tax-free — no income tax, no matter the amount.
Preservation age to 59:
- Tax-free component: Tax-free
- Taxable (concessional) component: Tax-free up to the low rate cap (~$235,000 in FY2025–26), then taxed at 15% + Medicare levy above the cap
Centrelink implications of a lump sum
Once withdrawn from super, the funds become a personal asset — typically cash or investments. These are assessed under the Age Pension assets test and income test (using deeming). Depending on how the funds are invested, this may reduce Age Pension entitlements.
Super in the accumulation phase for someone under Age Pension age is not assessed by Centrelink — keeping money in super until you need it may preserve Age Pension eligibility.
Risks of taking a lump sum
- Spending risk: A large lump sum may be spent too quickly
- Investment management: You take on full responsibility for managing and investing the funds outside super
- Tax on earnings: Income and gains outside super taxed at marginal rate (vs 0% in pension phase)
Option 2: Account-Based Pension
Converting super to an account-based pension — drawing regular income payments.
Tax advantages of pension phase
- Earnings on assets in pension phase: 0% tax (vs 15% in accumulation)
- Pension payments to those aged 60+: Tax-free
- This is the most tax-advantaged environment available to Australian investors
Flexibility of account-based pension
- Minimum annual drawdowns (4–14% depending on age) must be met
- No maximum withdrawal
- Can draw additional lump sums as needed (pension commutations)
- Can switch investment options within the fund
Longevity consideration
An account-based pension can run out if you live longer than the balance lasts. At a 5% drawdown on $600,000 in a balanced fund (assume 5% net returns), the fund may last 35+ years — but this depends entirely on investment performance.
Option 3: Combination — Take Some Lump Sum and Start a Pension
Most retirees benefit from combining both:
- Take a modest lump sum to:
- Pay off remaining mortgage
- Clear debts
- Fund a specific purchase
- Establish an emergency cash reserve
- Convert the remainder to an account-based pension for ongoing tax-free income
This preserves the tax efficiency of pension phase for the bulk of the funds while addressing immediate capital needs.
Comparison Table
| Factor | Lump sum | Account-based pension |
|---|---|---|
| Tax (age 60+) | Tax-free withdrawal | Tax-free income, 0% on earnings |
| Flexibility | Maximum | High — with minimum drawdown |
| Longevity risk | High — must self-manage | Moderate (balance can run out) |
| Centrelink impact | Counts as asset once withdrawn | Counted under deeming/assets test |
| Investment control | Full (outside super) | Within fund’s options |
| Estate | Fully accessible | Residual balance paid to beneficiaries |
Related Articles
- Account-Based Pension Australia
- Super Withdrawal Tax Australia
- Retirement Drawdown Strategy Australia
- Age Pension and Super Strategy Australia
- Retirement Investing hub
Frequently Asked Questions
Is it better to take super as a lump sum or a pension? For most retirees aged 60+, an account-based pension is more tax-effective than a lump sum — because 0% tax on earnings inside pension phase significantly outperforms the tax on equivalent investments held personally. A lump sum may be preferable for specific needs (debt repayment) or for those with very modest balances. Professional advice is recommended.
Does taking super as a lump sum affect the Age Pension? Yes, potentially. Once withdrawn from super, funds count as personal assets (and are deemed to earn income) under Centrelink’s assessment. Keeping funds in super accumulation until needed may preserve Age Pension entitlements — but this depends on your age and specific circumstances.
Can I take part of my super as a lump sum and convert the rest to a pension? Yes. This is the most flexible approach and used by many retirees. You can withdraw a partial lump sum at retirement and transfer the remaining balance to an account-based pension.
This article provides general financial information only. For advice tailored to your situation, speak with a licensed financial adviser through the ASIC financial advisers register or MoneySmart.