Super: Nearing retirement - what happens next?
You’ve spent your life accumulating your super and now you are nearing those retirement years you’ve been dreaming about. What happens now? How can you ensure that you are going to get the most out of your super?
One option that you can look into is an account-based pension (sometimes referred to as a super income stream). This will provide you with a regular and tax-effective income stream during your retirement.
What is an account-based pension?
You use the money you have accumulated in super to purchase an income stream, or account-based pension, that will pay you a regular income from your super. The income stream will usually be available once you’ve retired from work but in some circumstances, you may be able to access the money before you retire.
Every year you will need to withdraw a minimum pension payment, which will be calculated according to your age. There is no maximum payment amount which needs to be drawn each year, unless the pension was commenced as part of a transition to retirement pension. Your account-based pension account can hold a range of investments – including shares, fixed interest, cash and managed investments – depending on the investments offered by your fund
Benefits of choosing an account-based pension
- The main benefit of choosing an account-based pension relates to the tax savings. An account-based pension can be more tax-effective than taking your super as a lump sum.
- The earnings from investments in your account are tax-free. These tax-free earnings remain in your account and increase the account balance.
- Also, lump sum and pension payments from your accountbased pension are tax-free once you turn 60.
Prior to retirement
A transition to retirement pension is a more restrictive form of an account-based pension because lump sums cannot generally be received. So remember to set aside funds outside super to supplement income.
Some of the benefits of a transition to retirement pension include:
- The proportion of the tax-free component of your account-based pension balance at commencement will be returned as tax-free pension payments if you are aged 55 to 59.
- If you have reached your preservation age but have not yet turned 60, the portion of your payment that is taxable will be assessed at your marginal rate, but you will also be entitled to a tax rebate of 15 per cent based on the taxable component of the payment. What’s your preservation age? Read Transitioning to retirement.
You are able to transfer any investments in your super account with unrealised profits into your account-based pension account. Best of all, no tax is payable upon the roll-over, and you can sell the investment later tax-free.
- You can access your money whenever you need it.
- By investing in long-term growth assets, any returns you make should result in an increase in the value of your investment.
- If you are balancing your account-based pension income with other income sources, you are able to vary the amount of income you receive and the frequency and timing of each payment, depending on your changing needs. However, a specified minimum payment must be taken each year.
Centrelink uses deeming to assess income from financial investments. From 1 January 2015, the deeming rules are used to assess income from account-based pensions.
Deeming assumes that financial investments are earning a certain rate of income.
You'll find up to date information on deeming rates in Your guide to Centrelink and DVA Service
If you were receiving an income support payment on 31 December 2014 and had an account-based pension, this pension is grandfathered and is not assessed under the deeming rules.
However, if you choose to change an existing pension to a new pension, or purchase a new pension after 1 January 2015, the new pension will be assessed under the deeming rules.
Any choices you make that do not involve changing to a new product (eg changing your investment strategy) will not affect grandfathering arrangements. If you are an income support recipient with a grandfathered account-based pension and you cease to be paid an income support payment on or after 1 January 2015, the grandfathering provisions will cease to apply.
An account-based pension can run for your lifetime, as long as there is sufficient capital available, and can be transferred to your beneficiary (generally your spouse) after you die.
Account-based pensions are a good way to secure an income stream for your spouse.
Read more about Estate Planning here
Joe, aged 65, has just retired and has $350,000 in super, all of which is classified as a taxable component. After meeting with his financial adviser, he decided to use his super to commence an account-based pension. Under the levels set by legislation, for the first year of the account-based pension, Joe must draw a minimum of $17,500 (2014/15). Let’s assume Joe wants to receive $30,000 pa as a pension. At marginal tax rates, $30,000 of income normally results in tax payable of $2,242 (excluding Medicare levy and
tax offsets). However, as Joe is over 60, the pension is paid 100 per cent tax-free.
Belinda is retiring at 55 and has the same super balance as Joe. Her minimum payment requirement is $14,000. However, she wants $30,000 instead. Normally, the tax payable on this at marginal tax rates is $2,242. However, as Belinda has reached her preservation age (55), she receives a 15 per cent tax offset on the pension payment. This completely eliminates her tax liability. The Medicare levy may still apply.
Things you should consider
Make sure you have the right strategy in place so that your investment has the potential to grow and you are not just drawing from your retirement savings.
You need to be aware that account-based pension payments are not guaranteed to last your lifetime. As they are linked to the market performance, if markets rise or fall, your pension payments may increase or decrease from one year to the next.
Your account-based pension payments will cease once the account balance is exhausted.
You should also keep in mind issues that may interrupt your retirement strategy, such as the possibility of redundancy or an unplanned early retirement once you’re over 55.