The Centrelink treatment of lump sum withdrawals from super is important to understand.

There are a number of ways that lump sum withdrawals can be made from super and each way is assessed by Centrelink differently.

Making one lump sum withdrawal from super has the potential to wipe out Centrelink payments entirely, so it’s important to understand the implications before making the withdrawal.

While the Centrelink Age Pension, DVA Service Pension and Centrelink Disability Pension are the most common payments that lump sum withdrawals from superannuation will affect, keep in mind that other social security payments may be affected too.

A lump sum can be withdrawn from super in a number of ways.
 

Lump Sum Super Withdrawals – Centrelink

 
Specifically, a lump sum withdrawal can be made as:

The following discusses how these lump sum super withdrawals are treated by Centrelink.
 

Lump Sum Withdrawal Accumulation Account

 
Assets Test – A lump sum withdrawal from an accumulation account will reduce the value of the accumulation account that counts towards the Centrelink assets test.

Centrelink will need to be updated with the new balance of where the lump sum withdrawal was allocated to (e.g. personal bank account). If the withdrawal is immediately spent, then Centrelink only needs to be updated on the reduction of the accumulation balance as a result of the withdrawal.

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Centrelink will not need to be updated with the reduced accumulation account balance if the person is under Age Pension age, because super accumulation accounts are not assessed while the owner is under Age Pension age.
 
Income Test – If the owner of the super accumulation account is over Age Pension age, there will be no change in the Centrelink income test assessment of the lump sum withdrawal. That is, it will continue to be deemed in the same way it was deemed within super or, if spent, will not be deemed at all.

If the owner of the super accumulation account is under Age Pension age, making a lump sum withdrawal and paying the proceeds to a non-super account or investment may result in a loss of social security payments, as this will now be deemed.

Super accumulation account balances are not deemed while a person in under Age Pension age.
 

Full or Partial Commutation of Pension

 
Assets Test – A full or partial commutation of an account based pension will reduce the assessable value of the account based pension by the commutation amount.

Centrelink will need to be updated with the new balance of where the commutation was allocated to (e.g. personal bank account). If the commutation is immediately spent, then Centrelink only needs to be updated on the reduction of the pension balance as a result of the commutation.

All pension accounts are assessed under the Centrelink assets test regardless of whether the pension owner is over or under Age Pension age.
 
Income Test – If the pension account is a pre-1 Janaury 2015 grandfathered pension, the commutation will reduce the Centrelink deductible amount of the income being received from the income stream.

This could result in a higher level of pension income being assessed for Centrelink income test purposes, if the nominated income being received from the pension is not reduced by an amount equal to the re-calculated reduction in the Centrelink deductible amount.

You can use this calculator to calculate the Centrelink Deductible Amount of a grandfathered pension, or request a Centrelink Schedule from the allocated pension provider.

If the account based pension is not a grandfathered pension, there will be no change in the Centrelink income test assessment of the lump sum commutation. That is, it will continue to be deemed in the same way the pension was deemed or, if spent, will not be deemed at all.

Commutations of pensions will appear on the Centrelink schedule of the income stream.
 

One-Off Increased Pension Payment

 
Assets Test – A one-off lump sum increased pension payment from an account based pension will reduce the assessable value of the account based pension by the increased pension payment amount.

Centrelink will need to be updated with the new balance of where the increased pension payment was allocated to (e.g. personal bank account). If the increased pension payment is immediately spent, then Centrelink only needs to be updated on the reduction of the pension balance as a result of the increased pension payment.

All pension accounts are assessed under the Centrelink assets test regardless of whether the pension owner is over or under Age Pension age.
 
Income Test – If the pension account is a pre-1 Janaury 2015 grandfathered pension, the increased pension payment will increase the assessable income for Centrelink income test purposes. There will be no change to the calculation of the deductible amount.

This could result in a higher level of pension income being assessed for Centrelink Income Test purposes, if the nominated income being received exceeds the deductible amount, or the one-off lump sum increased pension payment causes the nominated income to exceed the deductible amount.

You can use this calculator to calculate the Centrelink Deductible Amount of a grandfathered pension, or request a Centrelink Schedule from the allocated pension provider.

If the account based pension is not a grandfathered pension, there will be no change in the Centrelink income test assessment of the one-off increased pension payment. That is, it will continue to be deemed in the same way the pension was deemed or, if spent, will not be deemed at all.
 

Lump Sum Super Withdrawals from Super – Centrelink Treatment

 
Ultimately, you need to consider the implications on social security payment prior to making a lump sum withdrawal from super.

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It is also very important to communicate with your super fund exactly how you would like the lump sum to be taken (i.e. lump sum from accumulation, pension commutation or increased pension payment).

Never assume that the super provider will know the best way to process your lump sum super withdrawal. It is unlikely they will understand or have the knowledge to calculate the consequences such withdrawals will have on your Centrelink payments.

Once the lump sum withdrawal is made, it is unable to be reversed. Centrelink will have no choice but to assess it as it was processed, which could result in thousands of dollars in reduced Centrelink payments.

Feel free to post any questions below about lump sum super withdrawals and Centrelink treatment of them.

Chris Strano

Chris Strano is a specialist independent superannuation author for SuperGuy.com.au - one of Australia's leading superannuation information resources.

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