Most people in the work-force today recognise that in the future, the Age Pension will be only for those in need of a basic financial safety net. For those aspiring to a more comfortable standard of living, it will be necessary to fund that from your own savings.
Superannuation is the vehicle of choice for saving for retirement – it is built entirely for that purpose, and despite frustratingly regular tweaks from the government of the day, continues to offer considerable tax advantages when used as intended.
What seems little discussed is what happens to your super when you finally retire.
Under current rules, one option is that you can withdraw it. But what then?
Most commonly people will look to convert their superannuation savings into an income stream. There are two options here:
- Account Based Pension
- Annuity
Account Based Pensions are the most popular option at retirement due to the flexibility they offer. An Account Based Pension is similar in look and feel to your existing super. You choose how your savings are to be invested, eg. a “Balanced Fund”. You then decide how much income you will draw, subject to an age based minimum. Most Account Based Pensions pay out income monthly, some also offer fortnightly payments. An owner of an Account Based Pension also has the option of lump sum withdrawals, an important element in ensuring you can handle whatever life throws at you.
An Annuity offers less flexibility but has the advantage of certainty. An Annuity is like a long term deposit in that when you commence it, the interest rate is fixed. The ups and downs of share markets are of no relevance to an Annuity – when you commence it you get a fixed rate and that is guaranteed for the life of the Annuity. Annuities can be configured in all sorts of ways. It could be that you put in a certain amount, and it matures in 15 years at the same value as you put in, paying out monthly interest along the way. Often however, they will mature at a lesser value than what you started with. Some will even mature and have no value at the end. Instead with each monthly payment that you receive, you are getting some interest, and also some of your capital returned to you. In this way the annuity is drip feeding your money back to you so that your retirement savings are being used for exactly what they were intended – funding your retirement.
Sometimes a combination of an Account Based Pension and an Annuity can be the best solution. Depending on your level of savings, the interaction between these options, and the Age Pension, can have an influence over what is the best course of action. As such, if you haven’t already formed a relationship with a financial planner before the point at which you retire, obtaining some expert advice at this point is likely to be very worthwhile.
Important Information:
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.