You’d be forgiven for thinking that retirement is as simple as hanging up the work boots, withdrawing your super balance and continuing to live your life, funded by a recently-accessible lump sum of cash.
However, there are various products and incentives in place for retirees to draw a portion of their super out over time, rather than in one big hit. Most of these incentives focus around maximising Centrelink benefits and maintaining low or nil tax-payable. The aim of these various incentives is to help keep spending low enough to see you keep your own personal wealth as long as possible.
The structure of these options always revolves around a way of pre-determining the income you will receive, and of course, within these products are various rules about whether additional lump sums can be withdrawn, and a whole heap of pros and cons in different features, ranging from a guaranteed income for life, to complete market exposure, with all it’s potential upsides (sometimes drawing an annual income and having the same balance the next year) and downsides (lack of flexibility, or being vulnerable to a falling market).
The rules change regularly and products evolve over time however the two main concepts are called annuities and account-based pensions.
An annuity is a guaranteed predetermined income, for a predetermined period of time, including the option to pay a predetermined annual income, for life. Annuities generally lack flexibility. Withdrawing a lump sum for an emergency or any other need is usually limited, is often not impossible.
An account-based pension is similar to a super account in that the account will often remain significantly invested, looking to make the funds grow and last as long as possible, with the added flexibility of being able to adjust your income as needed and withdraw lump sums as desired.
Investment earnings and income is tax free. There is a minimum that needs to be drawn every year to be eligible for this tax free investment and limits to income that can be drawn before reducing top-up benefits available from Centrelink.
How you end up structuring your retirement income will depend on a lot of factors which change often. It’s recommended that you start to discuss the finer details of what your retirement will look like starting from at least 5 years prior to retirement to make sure your plan covers all the bases and results in an outcome that takes you the distance.
To speak to a qualified Financial Adviser about creating a tailored transition-to-retirement financial plan, contact the Superannuation Advice Australia team.