Have your cake and eat it too with a retirement income stream

You’ve been putting spare cash into your superannuation fund, your retirement date is marked on the calendar, and you’ve started to imagine life without an alarm clock.

But before you can book the cruises your diligent saving will afford you, you need to make one big decision. What type of income will you choose to take in retirement?

There are two popular avenues in Australia for converting money accrued in super into an income: transition-to-retirement pensions (TTR) and account-based pensions.

These types of product are also known as retirement income streams, or allocated pensions, and the choice you make will be determined by many factors, including the size of your super balance and whether you intend to remain in the workforce in some way.

As Industry SuperFunds explains, there are many benefits to accessing your super while the balance remains invested, as retirement income stream products allow.

“You may also be able to supplement your income stream with the government Age Pension,” Industry SuperFunds says.

Transition-to-retirement strategy

A TTR strategy allows anyone who has reached their preservation age but is not yet 65 to access their super without retiring or meeting a ‘condition of release’. (Your annual super statement will tell you what portion, if any, of your savings are subject to release conditions.)

Setting up a TTR income stream involves opening what’s called an ‘income account’ alongside your regular super account. Some of your super savings are transferred to the income account to be drawn as regular payments, while your employer can continue to contribute to your super account, as can you, while it remains invested and earning returns.

A TTR strategy has the benefit of allowing you to continue to work full-time, part-time or casually, provided you withdraw no less than 4 percent and no more than 10 percent of the value of your super balance every tax year. This can be a good choice if you want to gradually reduce your hours of work without suffering a big drop in income.

Taking some of your super as an income while still contributing part of your salary to the super account can be a tax-effective way of maintaining your income while continuing building your super pot. This continued growth is particularly beneficial if you want to slow down your pace of work but are concerned your super balance isn’t yet healthy enough to stop work completely.

Industry SuperFunds have a tool that allows you to see how you could use a TTR strategy.

You need a minimum of $30,000 saved in super to be eligible to open an income account, and it’s worth noting that you can’t take a cash lump sum from your super while you’re working.

From July 1, the tax break that is currently allowed on pension investment earnings will be scrapped for TTR income streams, although the tax-free component of the income from your TTR will remain unchanged. This means earnings the invested portion of your super will be taxed at 15 percent.

The tax rate applied to any retirement income depends on your age and the nature of your super contributions.

Retirement Income Streams

Account-based pensions are like TTR income streams but are a better choice if you want to exit the workforce entirely.

As with a TTR income stream, drawing a retirement income stream via an account-based pension involves setting up an account with your super fund – sometimes called a ‘retirement phase account’ – then transferring a portion of your super to that account, which pays you an income. The rest of your super savings remain invested, with the returns continuing to build your super balance, even as you draw down money to live on.

The only restrictions to setting up a retirement income stream are those that relate to accessing your super more generally, including any conditions of release that are attached to your super savings. 

One of the benefits of a retirement income stream is that as long as you draw down a minimum amount each year – an amount determined by your age and super balance – you can take as large or small an income as you desire. Many people arrange to draw down an amount that ensures they remain eligible for the Age Pension, effectively providing them with two incomes in retirement.

Another upside of retirement income streams is that, unlike with TTR income streams, you can withdraw a lump sum at any time. And if you find you’ve overestimated your income needs, you can roll money back from your income account to your super account.

It’s worth noting, though, that from July 1, there will be a limit on the amount you can transfer from your invested super to your retirement phase account. The transfer balance cap will start at $1.6 million and will be indexed over time in line with inflation. Your super fund or financial adviser can give you more detailed information on how the cap will work in your specific circumstances.

You can continue to receive a retirement income stream until your super fund runs out of money, but another benefit to choosing this type of pension is that you can arrange to draw down less than you anticipate receiving in investment returns, which can extend the life of your fund and thus your income stream.

Should you die with funds remaining, the balance of your accounts can be left to a beneficiary.

Do you use your super as a retirement income stream? Has it worked well for you?