As you head towards retirement it can be pretty daunting. For a start, you are a facing life without a regular payslip, and it raises and important question: what are you going to do with your super?
Assuming you have reached (or are close to reaching) an age where you can get your hands on your super and you are no longer working, you have three main options available to you:
- Withdraw a lump sum
- Keep your funds in your super and start an income stream
- A combination of 1 and 2.
Let’s look at option 1.
Lots of retired Australians choose to withdraw a lump sum from their super account and use it to pay all or part of a large debt – like a substantial amount on the home loan or a personal debt. It’s also common to withdraw large amounts to pay for projects, such as a renovation to the home, or to replace major appliances.
However, there are things you need to consider before going down the path of withdrawing a lump sum.
The first is tax. If you withdraw super before you reach 60 years of age you need to consider the tax implications. If you’re 60 years or older, most withdrawals from taxed super funds are paid out tax free. When you withdraw funds from you super though, you are no longer able to access the reduced tax rates applying to any of your earnings within that fund.
Second, you need to consider how good you are at saving. While the money is tied up in your super fund you don’t have to worry about the temptations you might be confronted with, but a large sum of money sitting in a savings account could be a different story. You need to ask yourself how disciplined you think you will be because you don’t want to blow that money on anything other than the intended purpose – providing for your retirement.
Finally, when you withdraw from you super there is a risk you might not be able to contribute to your super fund down the track, should you wish to. This is particularly the case if you are aged over 65, as you must meet a work means test to be eligible to contribute into super.
Say you want to go with option 2 and start an income stream. You can use your super to start regular cashflow through an account-based pension or annuity.
An account-based pension would involve you super fund paying you a regular amount each month from your account. The minimum amount paid out is determined by your age, so anywhere between 4 per cent for those aged 65 or younger and 14 per cent if you’re aged 95 or older.
There are some nice tax perks with this option, including that no tax is applied to any of the earnings within your pension account, but also this method of income is flexible and gives you the option of withdrawing a lump sum should you need to.
However, with the good comes the bad and some of the drawbacks of an account-based pension include you being subject to rises and falls within the share market and that returns are not guaranteed, which could have you running out of money before you’d like.
Could an annuity be for you then?
In basic terms, you give a lump sum of money and the annuity provider guarantees you a series of payments over a set period of time in return. This basically means you are swapping a lump sump for an income stream.
How this differs from an account-based pension is quite simple. You have the certainty with your money using annuity that you don’t get with an account-based pension. With that guarantee of regular payments though, you don’t get the flexibility and you cannot withdraw a lump sum.
This brings us to option 3.
You might like the idea of a lump sum payment because it’ll allow you to address those large scale items like your home loan, but you also like the idea of getting a regular income because that’s what you’ve been used to for the past 40+ years.
If you want to do this with your super it’s best to talk to a qualified professional who can guide you through the process and offer advice on such a course of action. Click here to learn more about advice options.
Have you had to consider the income stream options available to you as you head towards retirement? What steps have you taken to work through them?
This article has been sponsored by AustralianSuper Pty Ltd ABN 94 006 457 987, AFSL 233788. The views expressed are those of Starts at Sixty and not necessarily AustralianSuper. For more information, please visit the AustralianSuper website.