“Lump sums can result in a reduction of a person’s transfer balance account, which comes with additional pension benefits or the ability to make in-specie withdrawals of fund assets,” Mr Colley explained.

He gave the example of Rob, a 68-year-old with a single account-based pension he had been drawing on since 2017, who needed to draw an extra $20,000 above his minimum payment amount in the 2019–20 year to meet his living expenses.

As Rob’s opening account balance on 1 July 2019 was $800,000, he would receive a total of $60,000 in the current financial year, consisting of the minimum payment of $40,000, which is 5 per cent of his account balance, plus the extra $20,000. His original opening balance when he commenced the pension in 2017 was $900,000.

“Under the way the transfer balance cap rules work, any amount that is taken as a pension payment does not reduce Rob’s transfer balance, but if the amount over and above the minimum pension payment is taken as a lump sum, the amount of the lump sum reduces the amount counted against Rob’s transfer balance,” Mr Colley explained.

“If the extra amount Rob requires this financial year of $20,000 was taken as a pension payment, there would be no reduction in his transfer account balance and it would stay at $900,000. But if he withdrew it from the pension as a lump sum, it would reduce his transfer balance by $20,000 to $880,000.”

Mr Colley explained that reducing Rob’s balance in this way could have advantages down the track, such as freeing up more contributions for him if he was to return to work or make a downsizer contribution, or allowing a greater amount of any death benefit pension he received in the future to be counted against his transfer balance account.

Additionally, receiving the amount as a lump sum also allowed Rob to retain the $20,000 as an investment rather than in cash if he preferred, Mr Colley said.

“The rules for paying pensions require pensions to be made in cash; however, if a lump sum is made, the payment can be made in cash or as an in-specie transfer of an investment,” he said. “Rob may wish to transfer some investments into his name, which means a conversion of any excess to a lump sum will come in handy.”