One of the most effective ways to provide some or all of your required level of income in retirement may be via a regular retirement income stream such as an account-based pension or an annuity. Some retirees may also be eligible for an Age Pension or other benefits from the Australian Government. It’s important to understand how all these options work, to determine the solution that is right for you.
With improved life expectancy and advances in medical science, Australians can look forward to a much longer and more active retirement than past generations. A male retiring at age 65 is likely to spend around 19 years in retirement and a female 22 years. Enjoying a long and happy retirement, however, may cost more than you think. According to the Association of Superannuation Funds of Australia (ASFA), the following lump sums are required to provide a comfortable level of retirement income for 25 years of retirement.
Your financial adviser can help you see how you are tracking by determining your future income potential, projecting your final savings at retirement, and taking you through your options.
Before you retire you have the option to ‘transition to retirement’ (TTR). This means you can reduce your work hours and supplement your income with potentially tax- effective withdrawals from your super through a transition to retirement income stream. Your financial adviser can help outline your choices and the impact that starting a transition to retirement income stream may have for your super balance at retirement.
Earnings on assets supporting a transition to retirement income stream are generally taxed at up to 15%. Prior to 1 July 2017, they were tax free.
As well as any Age Pension you’re entitled to, or non- super investments such as properties that you will retain and receive income from (e.g. rent), the most common way to provide for your required level of retirement income is with one or more regular retirement income streams. These include:
In some cases, the best way to provide for your retirement income could be to combine an account- based pension and an annuity.
An account-based (or allocated) pension lets you draw regular flexible pension payments from your super balance. Your pension account balance is adjusted in line with market movements, investment returns, pension payments, lump sum withdrawals and fees.
An annuity generally involves swapping some of your retirement savings for a guaranteed income stream payable over a specified period. The two main types of annuities are:
By guaranteeing your future income payments regardless of the underlying performance, the annuity provider effectively carries all the investment risk. They also offer flexible ownership options and indexing to protect against inflation. The trade off for an investor is you generally have no choice of investments, limited ability to make withdrawals and can’t change your income once the annuity has commenced.
The right mix of retirement income streams will depend on your individual needs and circumstances, which might include:
For example, you could consider using a lifetime annuity to provide enough guaranteed income (along with any Age Pension you’re entitled to) to allow you to meet your fixed income needs in retirement, while using flexible payments from an account-based pension to meet your additional non-essential spending needs – as shown in the following graph.
We can help you decide the mix of income streams that best suits your circumstances.