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.
Will I have enough to retire?
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 will likely 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.
|Income required for comfortable retirement||Lump sum required|
|Couple (combined)||$58,784 pa||$640,000|
We 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.
Transition to retirement – flexibility and choice
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 pre-retirement pension. Alternatively, you can continue your current level of work, receive potentially tax-effective withdrawals from a pre-retirement pension and increase your super contributions.
We can help outline your choices and the difference this may make financially, once you retire. A pre-retirement pension forms part of a TTR strategy and is subject to a maximum annual drawdown of 10%. If you are fully retired, there is no maximum drawdown limit and payments will continue until your account balance is exhausted or you withdraw it in full. You also have a wide choice of investments including low-risk term deposit and cash products, and you can generally switch options at any time should your needs and circumstances change.
How do I access an income in retirement?
As well as any Age Pension you’re entitled to, or non-super investments such as properties that you will retain and receive rent from, the most common way to provide for your required level of retirement income is with one or more regular retirement income streams. These include:
- Account-based (allocated) pensions – these must be purchased with your super savings
- Lifetime or term annuities – these can be purchased with either your super or non-super savings
In some cases, the best way to provide for your retirement income could be to combine an account-based pension and an annuity.
What are account-based pensions and annuities?
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:
- Fixed term annuities which pay a guaranteed income for a defined period of time eg 20 years
- Lifetime annuities which pay a guaranteed income for the remainder of your life.
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.
Combining retirement income streams
The right mix of retirement income streams will depend on your individual needs and circumstances, which might include:
- Your fixed and variable income needs in retirement
- Whether you will need to access some of your retirement savings as a lump sum in the future
- How important qualifying for social security benefits such as the Age Pension is to you
- Your estate planning needs, including whether you want to leave an inheritance to your dependants in the future
- Your tolerance for risk when investing
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 nonessential spending needs.
Why financial advice is important for retirement
Talking to us before you retire will help put you on the road to financial security and access the following benefits:
- Getting help from an adviser can help you decipher complex super and tax legislation and translate them into actionable strategies.
- They can help you assess the best income stream options and also structure your retirement portfolio to minimise tax.
- They are supported by a network of technical and qualified specialists in super and retirement.
- You can schedule regular reviews to ensure you stay on track before and after you retire so all you need to focus on is enjoying a new more relaxed lifestyle.