Lump sum decision-making: 

What could possibly go wrong?

Lump sums can come and go in diverse ways. When it comes to retirement, it used to be much simpler to work out how to handle them.

Over time, the many ways of contributing to, or withdrawing from, your superannuation have increased.

The good news is that more relaxed rulings now give you more options – and more flexibility with your own savings.

The bad news is that decision-making just got a whole lot harder.

After you have reached Preservation Age the type of lump sums you need to know more about handling include:

• Proceeds from the sale of assets
• Any significant amount of cash received
• Inheritances
• Windfall gains
• Gifts
• Severance or redundancy payments
• Work-related bonuses
• Divorce settlements

Next, there are three different ways of viewing the top-level lump sum information you will need depending upon your current, or likely, retirement income situation.

Pre-retiree

If you are pre-retirement, you may use lump sums to save for retirement and ensure your decisions result in the optimum asset allocation to build your future nest egg. You are subject to lump sum rules on superannuation and knowing these rules will help you maximise your outcomes.

Receiving an Age Pension

If you are on a part or full Age Pension (or think you will be on one in the future), then you need to know how Centrelink views the way you manage these lump sums and how it uses this information to determine your entitlements.

Get your decision making right and you will maximise your entitlements.

Get it wrong and you stand to lose them.

The main mistake many people on the Age Pension can make is that while a lump sum looks and feels like an asset, this money is usually also viewed as an income earning asset. If you see such funds as an asset only, it could mean that you concentrate only on observing asset thresholds. But this same bucket of money can reduce your fortnightly pay check if income is deemed on that asset by Centrelink.

Self-funded retirees

If you are self-funded in retirement, you are not currently subject to Centrelink requirements. But if you feel you will transition to an Age Pension in the future, it is useful to know how the rules work, so that you don’t waste opportunities to maximise future entitlements. As with pre-retirees, the ever changing laws related to super need to be followed to ensure that you are moving your funds in the most efficacious and compliant manner.

What could possibly go wrong?

George missed the memo on super caps

George and Margery are transitioning to retirement. Both still work part-time and George is earning a high salary as a consultant. Margery works in Aged Care and is not very well paid but loves her daily engagement with older people. George is determined they will have a large nest egg when they both retire in another four years. But his saving fervour hit a snag a few months ago when their accountant realised that George has been contributing far too much to their Self-Managed Super Fund. Not realising the different treatment of pre and post-tax contributions, he has gone way over the cap of $27,500. They are now facing quite a high tax bill ($12,000) which is both unexpected and unwelcome in a year when they are finishing a major kitchen renovation.

George thought he knew the rules but didn’t check them and didn’t seek advice. He needed to know how much he could salary sacrifice and how much would need to be an after-tax lump sum contribution.

Watching dwindling savings

Trudy reached preservation age four years ago and retired on a full Age Pension shortly afterwards. With $190,000 in her account with an industry super fund, she felt that her savings were too low to worry about, and that she would remain on an Age Pension regardless of how she handled this money. So she withdrew the full amount and put it into a 12 month term deposit. This was against the advice of her daughter, but Trudy felt this money was safer in cash than in super. She has rolled this money over annually ever since. The result is that whilst this money, invested in super in a balanced option, would have grown by about 8% annually (for example, Australian Super’s balanced option has averaged a 9.32% return* over the past decade) her cash has earned virtually no interest and is now being eroded by rapidly rising household costs. On an ‘apples with apples’ basis she is about $53,000 worse off. She is now looking at heading back to work and recontributing her cash into an accumulation account, but is seeking help on whether she can even do this. Trudy was victim to the thought, frequently held by retirees with modest savings, that she ‘didn’t have enough to worry about’. That’s just not right. Every penny counts – and even more so when your savings are low.

The old saying that we ‘don’t know what we don’t know’ is entirely true when it comes to retirement income in general, and lump sums in particular. A strategy consultation with one of our experienced advisers gives you the chance to check your sums before you commit to an action that can cost you dearly.

Read more detail on lump sum contribution and payment rules here

Talk to an Adviser about how lump sums can affect you?

*The average return over 10 years for AustralianSuper’s Balanced option is 9.32% per annum to 30 June 2022

This article is provided by Retirement Essentials Representative Number: 001260855.  We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859.  This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.