When it comes to dreaming about retirement, for many people a big part of the dream is finally being able to withdraw some money from their superannuation, whether it be to spend on the holiday of a lifetime or much-needed home renovations.
Accessing a lump sum to spend, whether it be for practical reasons or to tick off a long-cherished bucket-list item, can be a good decision for some retirees. The Productivity Commission even says that for people with small super balances of $10,000 to $20,000 taking a lump sum may be the best strategy because the amount withdrawn isn’t sufficient to create a meaningful retirement income and if left in the super system will usually attract fees.
Other common, and practical reasons for taking a lump sum include using the money to pay off a mortgage, do home renovations or invest in consumer goods – all moves designed to reduce any burden on what’s likely to be a lower, fixed income in retirement.
Others choose to withdraw a lump sum to reinvest outside the super system or to hold in a bank account, as these options can provide easier access to emergency cash. As the Productivity Commission says in its report on superannuation policy, “there is little evidence to suggest that [lump sums] are being squandered” by older Aussies.
Tim Howard, an advice specialist at BT Financial Group (BTFG), says the decision to take a lump sum at retirement, whether your intention is to spend it immediately or roll it into an income-producing non-super investment, is one only you can make.
“The right decision, for any individual, is about what’s going to suit what they want to achieve,” he says. “Some people do make the conscious decision to withdraw their money from super, go on a big holiday or pay down debt on the family home, then rely on the Age Pension to fund their income in retirement.”
He does, however, caution against withdrawing some or all your super balance as a lump sum without thinking over a few key points.
Rather than taking a lump sum to spend or reinvest outside super at retirement, many Australians choose to draw down only enough to create a retirement income through an account-based pension product within the super system. The rest they keep invested in their super fund so it has the potential to grow during their retirement. This is called creating a retirement income stream
Retirement income streams are often tax-smart for two reasons. If you plan to make super contributions after the age of 60, after-tax contributions are not taxed when contributed to your fund, while concessional contributions are taxed at 15 per cent. And your super balance has the prospect of continuing to grow, with the investment returns earned by your fund also taxed at a maximum rate of 15 per cent, or 0 per cent when you start a retirement income stream.
Even if you don’t intend to continue to make contributions, keeping some of your super invested in a tax-efficient environment is one way of preparing for what’s likely to be a longer retirement than your parents enjoyed, simply because keeping your savings in a low-tax, growth-friendly environment such as the super system could give your nest egg a better chance of providing you with an income through a long retirement.
Any income drawn down from super, as well as any lump sum, is tax free from the day you turn 60.
As BT’s Howard points out, deciding to spend your super savings and live entirely on the pension is valid choice to make – assuming your actions don’t impact your pension eligibility.
However, it’s worth thinking about the difference that the lack of a private income to supplement the pension may mean to your lifestyle over what could be as many as 30 years in retirement.
Some fund managers say they can put in place an income stream from super balances of as little as $50,000, so there may be more opportunity to bolster your pension with your super savings than you think.
“Talk to the trustee of your super fund about your options,” Howard advises. “They should be able to provide you with some advice on what income stream options are available, which would help you make that decision.”
It’s a common misunderstanding that any decision on whether to take a lump sum or not must be made when you settle on your retirement date and start thinking about your future income.
In fact, there’s no requirement that you take a lump sum at retirement, as long as you meet the minimum drawdown requirements set out in the current pension rules, which is 5 per cent of your total super balance if you’re aged 65-74. That percentage rises to a maximum of 14 per cent for 95-pluses, but other than that, your balance can remain invested in your super fund for as long as you like.
“You don’t need to rush in, there’s no pressure to do anything,” Howard says. “Your savings can sit in superannuation indefinitely so you could wait any number of years before making your decision if you’re unsure of what you want to do.”
He advises speaking to a financial adviser if you’re unsure about whether a lump sum – to spend or to reinvest – is right for you, and to think carefully before making any decision.
“Find out what options you have, and think it through,” he says. “Spend some, spend more, spend none, invest it, spend the income, grow the capital – whatever the combination, know what it means for your personal situation. Once you’re informed, it’s up to you to decide what’s most appropriate.”
Things you should know: Information current as at October 27, 2018. BT Financial Advisers are representatives of Westpac. BT Financial Advice is a division of Westpac. The information in this publication is general information and factual only. It does not constitute any recommendation or financial product advice. The information has been prepared without taking into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. You may wish to consider getting your own independent professional financial and taxation advice. This information may contain material provided directly by third parties and has not been independently verified and Westpac is not in any way responsible for such information. © Westpac Banking Corporation ABN 33 007 457 414 AFSL and Australian credit licence 233714.
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