Super options in retirement

What are you option’s for your Super at Retirement

Compulsory superannuation contributions have led to most Australians having a large sum in their super when they retire. I’m often asked, ‘what should I do with my super when I retire?’ These funds are intended to provide income in retirement and once you have met a condition of release, you have a number of options.

The simplest option is to withdraw your super in a lump sum. There are two main situations where this is appropriate; for one-off large expenses such as renovations and new cars, or to repay any outstanding debts. We don’t recommend taking out a lump sum with the view to this being used to provide ongoing income. This is due to the tax ramifications; all income earnt within the super system in retirement (once in pension phase) is tax free, income outside super is taxed at marginal tax rates.

For most clients, the bulk of their superannuation is converted to pension phase. Once in pension phase all earnings become tax free, as is the income provided from the pension. You are required to withdraw a minimum pension based on your age.  

Once in pension phase, there 2 different types of income streams; account-based pensions and annuities. Each has different strengths and weaknesses and work very well in conjunction with each other.

An account-based pension (also known as an allocated pension) is by far the most common type of income stream. An account-based pension allows you to invest in a wide range of investments (almost exactly the same as your super) and draw any income you choose providing it is more than the minimum. You are able to withdraw lump sums if required and adjust your pension as often as you see fit. The balance of your account will rise and fall based on the investment returns and withdrawals. If you run out of money, so be it. If you pass away, the balance is transferred either to your partner or your estate.

Account-based pensions are flexible and liquid; you bare all investment and longevity risk. The entire balance is assessable under the Centrelink asset test and for all recent account-based pensions, assets are deemed in the same way as other assets (older account-based pensions are treated more favourably for income test purposes).

Annuities are the other type of income stream. These are very different in that you invest with the annuity provider who agrees to pay a set income for a set period of time, including lifetime pensions. There are normally options to include increases for inflation, return of capital at the end of the period and, in the case of life-long annuities, guaranteed payment or withdrawal periods. They also have favourable treatment for both the Centrelink asset and income tests.

Annuities are very safe, but inflexible. The annuity company bares the investment and longevity risk. The income is set and can’t be changed and lump sums are not easily withdrawn.

When approaching retirement, please seek advice on which combination of these options will best achieve your financial goals.

Categories: Future Financial Services Blog

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