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How should you access your super in retirement?
The option you choose can make a big difference to your lifestyle and long-term financial security — but there’s no one size fits all solution.
Traditionally, it’s been assumed that retirees generally take around half their savings as lump sum payments when they retire. But that conventional wisdom has been turned on its head by research from Colonial First State and Rice Warner - Savvy retirees seek long term incomes - which reveals that more than 83% of retirement benefits are used to acquire a pension or annuity. Even more tellingly, that figure is predicted to rise to over 95% within 10 years.
So why are pensions and annuities so popular? What are the options and how do you choose?
Pensions and annuities are rapidly outpacing lump sum payments as the most popular form for retirees to take their super.
Option 1: Account-based pension
An account-based pension is a superannuation account that pays a regular income. It gives you the freedom to choose your preferred investment strategy and even make lump sum withdrawals when you need them.
You can vary the regular pension (within certain rules), so you can adjust the amount you draw depending on your needs and your account’s investment performance. However, your income is not guaranteed — so if the markets turn against you, you could find yourself earning less than you expected and consequently your capital can run out sooner.
If you’re age 60 or older, you won’t have to pay any tax on your pension income1. But if you’re under age 60, you’re likely to pay tax on amounts drawn from concessionally-taxed earnings and super contributions, such as employer contributions and salary sacrifice payments. However, if you are above preservation age (between 56 and 60 depending on your date of birth) and under age 60, a tax offset is available.
Option 2: Annuity
An annuity is a product provided by a life insurance company that gives you a set, regular income for either a specified period or for the rest of your life, depending on the product you choose. That means an annuity can give you more security than an account-based pension, since your income is fixed no matter how markets perform. It can also be tax-effective, with income from annuities purchased with superannuation money taxed in the same way as account-based pensions, giving you a tax-free income once you turn 60. Different tax treatments apply to annuities purchased with non-super money.
However, annuities are also less flexible than pensions, since you can’t choose where the funds are invested.
Annuities provide income at a fixed rate, which means you will not benefit if interest rates rise in the future. However, your level of income is protected if interest rates fall.
Creating the right combination
Of course, you don’t need to choose just one option. You can get a combination of long-term security and the flexibility to change your strategy as your needs change.
For example, you might consider dividing your income stream between a pension and annuity, One strategy is to use the annuity to provide a guaranteed base income while investing the remainder in a pension, with the opportunity to earn extra if investment markets are strong.
You could also take some of your super as a lump sum payment, while using the rest to fund a long-term income stream. Note that if you’re age 60 or over, you generally won’t pay tax on a lump sum. If you’re under age 60 and above preservation age, you can draw up to $195,000 tax free, while paying tax at 17% (including Medicare Levy) on the rest.
Get professional advice
Superannuation laws are complex and everyone’s situation is different, so it’s important to choose the right options for your individual needs. That’s where a professional financial adviser can make all the difference.
Did you know?
Pension and annuity products can be accessed through Colonial First State FirstWrap and FirstChoice. To find out more, talk to your adviser or call 1300 360 645.
1 Assuming account-based pension paid from a taxed superannuation fund.