How can your pension and your super fund work together better

There are very few people who could fund their retirement dreams with the Government Age Pension alone. But with a little extra income from your super fund – and a little time carefully considering the right financial plan – it may help you achieve the lifestyle you want.

If your super balance is lower than you would like, this simple strategy could make an enormous difference. In fact, you may even find it extending the life of your savings, leaving with you with more money to enjoy retirement.

How can the pension and super work together?

Your super fund balance can work nicely as a supplement to your pension if planned the right way. The key is to begin drawing on your super not as a lump sum, but in small, regular increments as a retirement income stream.

The Age Pension is both income and assets tested, meaning it will be shaped by the income you receive and the assets you own. If you earn more than $164 per fortnight ($292 for a couple), every additional dollar of income will reduce your Pension payment by 50 cents.

As such, a small income stream from your superannuation can be a good idea. It might only be enough to ensure monthly bills are paid. It could be a small top-up that can raise your standard of living from day to day or it could be savings for a little holiday. But it may offer a real and tangible difference to your lifestyle.

You could even choose to receive your payments each fortnight in alternating weeks to the pension. This means you can get more money in the bank every week, rather than every fortnight.

The important thing is to draw down only what you need for the life you want, leaving the bulk of your savings invested in super

What if I run out of super?

The biggest advantage of this strategy is that your super stays invested, meaning it could continue to work hard while you slowly draw down.

This needs to be a careful balancing act, and not a decision anyone needs to make alone. If you’re not sure what amount is right or sustainable for your lifestyle, most super funds will offer free financial advisors who will help you weigh up your options.

How does this work for an individual with a low super balance?

Barbara retired five years ago at 65. Now divorced, she lives on her own in a rental property. She spent much of her life out of the workforce raising a family, leaving her super balance at just $50,000 as she reached pension age. To make life more comfortable, Barbara used a small income from her super balance to improve her income on top of the pension.

On advice from her fund’s financial planners, she withdrew around $104 per fortnight from her super, which allowed her to maintain her Age Pension payments. This amounted to around $2,700 per year coming out of her super fund – extra funds she used to enjoy a holiday with her family every Christmas – and gave her an annual income of about $26,500 a year over the past 5 years.

Drawing this amount as an income stream, Barbara continued to keep her super invested. By the time she reached 70, her super balance had grown from $50,000 to over $60,000. ^[i]

How does this work for a couple with a larger super balance? 

If your assets or income disqualify you from the Age Pension, an income stream can serve as a very effective substitute.

John and Mary, 65 and 66, entered retirement five years ago after long careers. They have no children, an investment property worth around $500,000, and substantial super balances when they retired ($350,000 in John’s fund, $450,000 in Mary’s).

The couple earns around $26,000 per year from their investment property.

Rather than taking out their super as a lump sum, they were eager to see their hard-earned savings act as a regular income in retirement. On the advice of their Industry SuperFund financial planner, they set up income streams, bringing in a combined amount of around $43,000 extra per year.

By drawing only what they need for their lifestyle and keeping as much as possible in super, in just five years John’s $350,000 reached over $420,000; Mary’s $450,000 is now approaching $550,000. ^[ii]

Is your super fund right for this strategy?

David Whiteley, Chief Executive of Industry Super Australia, says combining an income stream with the pension can be particularly beneficial if you choose your fund wisely.

“This is a very common strategy for members of any fund, we’ve found Industry SuperFund members have, on average, been better off in the long run,” he says.

Australia’s 15 Industry SuperFunds run only to benefit members – not shareholders – they keep their fees low.

This advice can help you determine the best income stream for your needs, how it can best work around your pension, and how your hard-earned savings can continue to grow in the years ahead.

Click here to learn how you can supplement your pension with a retirement income stream.

^{[i] Barbara is not an actual member. Her story has been created for illustrative purposes. Modelled outcomes by SuperRatings, commissioned by ISA, show 5 year average net benefit results taking into account historical earnings, fees and drawdown amount of 5% p.a. of the main balanced investment options of 15 Industry SuperFunds’ retirement income products during the first 5 years of retirement. Example assumes the average 5 year Industry SuperFund investment return of 9.49%, starting balance of $50,000, starting age of 65, home is rented, access to the full Age Pension including rent assistance, single, no other income sources available. Modelling as at 30 June 2016. Capital growth will not continue throughout retirement. Past performance is not a reliable indicator of future performance. Outcomes vary between individual funds.  Consider a fund’s Product Disclosure Statement (PDS) and your personal financial situation, needs or objectives, which are not accounted for in this information, before making an investment decision.  For more details about the SuperRatings modelling see industrysuper.com /assumptions.}

^{[ii] John and Mary are not actual members. Their story has been created for illustrative purposes. Modelled outcomes by SuperRatings, commissioned by ISA, show 5 year average net benefit results taking into account historical earnings, fees and drawdown amount of 5% p.a. of the main balanced investment options of 15 Industry SuperFunds’ retirement income products during the first 5 years of retirement. Example assumes the average 5 year Industry SuperFund investment return of 9.49%, starting balances of $450,000 and 350,000, starting ages of 60 and 61, home is owned, not eligible for the Age Pension, married, investment property worth $500,000 with 5% yield increasing annually with inflation, 5 year investment return of 9.49%. Modelling as at 30 June 2016. Capital growth will not continue throughout retirement. Past performance is not a reliable indicator of future performance. Outcomes vary between individual funds. Consider a fund’s Product Disclosure Statement (PDS) and your personal financial situation, needs or objectives, which are not accounted for in this information, before making an investment decision. For more details about the SuperRatings modelling see industrysuper.com /assumptions.}

IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.