Not that long ago, if you were coming up to your 65th birthday, you generally had to make a difficult choice – either ‘cash out’ your superannuation by taking a lump sum payment or use your retirement savings to buy an annuity.
If you didn’t make up your mind before you turned 65, your super fund would make the decision for you and you’d automatically be paid a lump sum by the fund (after it had taken out the taxman’s slice).
But that’s all changed. These days there is no requirement to take your money out of the super system when you do retire. Instead, provided you’ve reached preservation age (which is usually 60), you’ve got a range of options to choose from, which include:
If you’ve reached age 65 and have entirely left the workforce, you generally can’t contribute to super so ‘cashing in’ your benefit could mean you’re locked out of the super system forever.
Gemma Pinnell, director of strategic engagement for Industry Super Australia, suggests retirees think carefully before cashing in even small super balances because it’s a decision that could be final. Instead, she suggests considering keeping your money in super, where the balance of your savings remains invested, even while you draw down an income that can supplement your Age Pension.
“Keeping your superannuation invested, even in retirement, means your balance may continue to grow even though you are taking out a regular income from it,” Pinnell says. “Income streams can also offer tax benefits.”
She explains that account-based pensions – the financial product that most Australians use to create an income stream from super savings – are a tax-effective (and Centrelink-friendly) way of topping up your income in retirement.
“Account-based pensions, also known as income streams, are like receiving a regular income,” Pinnell says.
“Rather than coming from an employer though, the money comes from an account within your superannuation fund, while the rest of your super balance remains invested.”
The earnings on your invested balance of super savings will rise and fall in line with the performance of the underlying investments, while you are paid a regular, fixed amount from the ‘pension account’ part of your super. And your invested money isn’t locked away either – you can change your investments or make withdrawals at any time, without being hit with a tax bill.
While some big figures are commonly thrown around when people talk about how much money you may need to retire with, Pinnell says even retirees with modest super balances – we’re talking $50,000 or less – can benefit from using an account-based pension to create an additional retirement income.
“Each superannuation fund has a different minimum amount they require for you to have before you open an income stream,” she says.
“For people with low balances, choosing to receive an income stream rather than taking a lump sum could be a great idea because it can help maximise the amount of Age Pension they receive, while the amount remaining in their superannuation balance can stay invested and so have the potential to grow further.”
You may not even need to change superannuation providers to start an account-based pension, Pinnell says, because most superannuation funds – and certainly all Industry SuperFunds – offer income stream products.
Pinnell says a lot of marketing is aimed at pressuring retirees to cash out their super and invest it outside the super system or transfer it to another super fund.
“When choosing a super fund, it’s important to consider whether all the returns generated by the funds invested are delivered to members or whether part of the profits go to shareholders,” she says. “Also consider the fees associated with the account and, of course, what the fund’s returns have been previously.”
“There are a lot of super funds out there, but people can know that if they’re with an Industry SuperFund, they’re with a fund that’s run to benefit them, with lower fees and a proven outperformance record compared to retail or bank-owned funds.”
If you’re not sure whether an income stream is the right fit for your retirement, why not talk to a professional? All Industry Superfunds have qualified advisers who can help you understand your options. In the meantime head to the Industry SuperFunds website, where you’ll find a range of tools and calculators to help you work out the best approach for your retirement.