As people get closer to retirement, they often start making plans about what they are going to do with their newly-free time. But while dreaming about a holiday or thinking about starting a new hobby can be fun, one of the most important aspects of retirement you need to plan for is how you will use your superannuation, writes Pauline Vamos.
When withdrawing your superannuation, you can choose to receive it as a lump sum, a retirement income stream,or a mixture of both. For some people, taking a lump sum pay-out is the preferred option. However there are many other options available which may be better for ensuring your financial security in retirement. Depending on your circumstances, these can lead to more sustainable investment returns and less tax paid, which will ultimately give you a higher income in retirement. We all want to have enough money to enjoy our post-work years, which is why it’s so important to think about how you want to spend your retirement, and find a product that is suitable for you.
INCOME STREAM PRODUCT VERSUS LUMP SUM
There are a number of reasons why you might choose to have an income-stream product in retirement, such as an allocated pension, as opposed to taking a lump sum.
Firstly, most people can expect to finish up work with 20 years or more to enjoy their retirement. That’s 20 years where your money can remain invested as your draw down on it as a pension.
The good news is the investment income earned on a pension account held in super is tax-free after the age of 60, which means any returns you earn will go straight towards boosting your pension account balance. Drawing down on your superannuation over a long period also provides some protection against longevity risk, which is the risk that you will outlive your superannuation savings. Let’s have a look in detail at the different types of retirement income-stream products and strategies available.
ACCOUNT-BASED PENSIONS
Account-based pensions are the most popular pension product at the moment. They are a product that you buy using your superannuation, which then pays you a regular income during your retirement. What the product provider does is set up an account in the superannuation fund from which you draw your income.
Most superannuation funds now offer account-based pensions. The market also is growing, which means a more diverse range of providers and options to choose from. Some products offer market-linked returns plus an income, and others offer a capital guarantee which protects the dollar value of your original investment. When you die, the balance of your account goes either to your estate or to your beneficiaries. Seeking advice from a financial adviser or your superannuation fund will help you choose which option is best for your individual circumstances.
TRANSITION TO RETIREMENT PENSIONS
If you are 55 and still working full or part-time, then setting up a transition to retirement pension may be a good option for you. They work by allowing you to salary sacrifice all or a portion of your salary into your superannuation account, then drawing a pension while also working. The superannuation contributions are taxed at 15 per cent, while the investment earnings are tax-free after age 60. As an additional bonus, once you hit 60, the pension withdrawals are also tax-free.
LIFETIME OR TERM ANNUITIES
With more and more people living longer in retirement, the chances that you may run out of money to fund the lifestyle you want in your post-work years is growing. Investing in a post-retirement income stream product that protects you against the risk you may outlive your retirement savings can help give you peace of mind that you will be financially secure for all your retirement years. Lifetime annuities are one type of product that can offer this sort of protection. When you purchase a lifetime or term annuity, you essentially exchange that lump sum investment for a guaranteed monthly payment, for either a set number of years or for the rest of your life.
Unlike account-based pensions, the investment returns are not market linked, but are instead set at an agreed rate when you purchase the product. This means they also protect you against the risk of a downside market crash.
Lifetime annuities provide protection against market fluctuations and also will be paid for your entire life, but if you die there is no payment to your estate. However, while lifetime annuities are popular in a number of countries, at present not many are sold in Australia.
MAKING A CHOICE
We all have different ideas about how we want to live our retirement years, which will impact how we use our super. Given that it’s such a big and important decision, the best idea is to seek expert independent financial advice. This will help you decide which product will be the best fit to fund the lifestyle you want to have in retirement.
About
Ms Pauline Vamos
CEO ASFA
The chief executive of the Association of Superannuation Funds of Australia (ASFA), Pauline Vamos is a qualified lawyer and has over 20 years’ experience in the financial services industry. One of the most authoritative speakers on the industry, Pauline has been a regulator, corporate counsel, head of compliance, a strategic risk consultant as well as a trustee director. She is constantly sought for comment by media and as a speaker for business.
Previously, Pauline was director, financial services regulation – licensing and business operations at the Australian Securities and Investments Commission. In that role, she managed the successful implementation of the Financial Services Reform Act. This position cemented her reputation as a leading industry figure and she was voted “Most Influential in the Financial Services Industry” in Money Management as well as “Most Influential in the Superannuation Industry” in Super Review.
Pauline is a member of the Federal Government’s Superannuation Advisory Committee and was on Treasury’s Stronger Super Peak Consultative Group; tasked with advising the Government on how to best implement the Stronger Super package announced in response to the Cooper Review of superannuation. In May 2012 Pauline was appointed to the Advisory Council for the newly established Centre for International Finance and Regulation; an academic centre of excellence for research and education in the financial sector. She also sits on the Infrastructure Finance Working Group and the Superannuation Roundtable announced in early-2012.
Association of Superannuation Funds of Australia (ASFA)
ASFA is the peak policy, research and advocacy body for Australia’s superannuation industry. It is a not-for-profit, sector-neutral, and non-party political national organisation whose aim is to advance effective retirement outcomes for members of funds through research, advocacy and the development of policy and industry best practice. Plan What to do with Your Superannuation on Retirement
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