A big decision for retirees: The best way to turn your super into income
More than five million Australians watch their superannuation savings achieve very healthy growth in an industry super fund.
But many of those industry super members aren’t aware of the options they have to maximise their income in retirement.
It’s a dilemma David Whiteley, the CEO of Industry Super Australia, recognises only too well.
“One of the biggest myths people have about super is that your super fund is where your savings are held while you are working, with many people planning to leave their fund once they retire,” he says.
That may be because industry super funds have existed only since the 1980s, when they were created as an alternate to bank- and insurer-owned retail super funds, and in many people’s mind are still closely related to the workplace itself.
But in fact, there’s no requirement to exit your industry super fund at retirement.
“Super can be for your whole life, working hard and continuing to grow for you even when you are in retirement,” Whiteley explains.
In other words, by opting to create a retirement income from your super balance with your industry fund, you could continue to reap the strong returns the funds have historically achieved, while still receiving a regular income.
In this article, the second in a four-part series about industry super funds, we explain how to do just that.
TTRs versus account-based pensions
Two of the most popular ways in Australia for creating an income stream from super include transition-to-retirement pensions (TTR) and account-based pensions.
Both options are known as retirement income streams, or allocated pensions. The option you choose will be influenced by many factors, including the size of your super balance and whether you intend to remain employed in some capacity.
Most importantly, industry super funds offer both types of income product and can support you as you change jobs, transition into retirement or retire altogether.
“Industry super funds offer income stream products that provide regular payments during retirement while your balance remains invested,” Whiteley says.
Best of all? “Your super balance may even continue to grow in the early years of retirement,” he adds.
What are transition-to-retirement pensions?
Gradually easing out of full-time work is a popular way of preparing for retirement. The government’s transition to retirement provisions allow you to reduce your work hours as you reach retirement age, without reducing your income or compromising your standard of living.
A TTR strategy allows anyone who has reached their preservation age but is not yet 65 to access their superannuation without retiring or meeting a ‘condition of release’. Your annual super statement will tell you what portion, if any, of your savings are subject to release conditions.
Setting up this type of income stream involves opening an income account alongside your regular superannuation account. A portion of your super nest-egg is transferred to this account, and drawn down as regular payments.
Meanwhile, you and your employer can continue to contribute to your original super account as long as it remains invested and potentially earning returns.
The transition-to-retirement approach is flexible, in that it allows you to keep working full-time, part-time or casually, as long as you withdraw no less than four percent and no more than 10 percent of the value of your super balance every tax year.
This can be a great option if you want to gradually reduce the number of hours you work without suffering a big drop in income. It can also be a tax-effective way of maintaining your income while continuing to build your super balance.
What are account-based pensions?
If you are planning to leave the workforce altogether, an account-based pension may be a better option.
Like the TTR income stream, this option involves setting up an account – sometimes called a ‘retirement phase account’ – with your super fund, then transferring a portion of your super to that account, which pays you a regular income.
The rest of your super savings remain invested, with the returns potentially continuing to build your super balance, even as you draw down money to live on.
The only restrictions to setting up a retirement income stream are those that relate to accessing your super more generally. Your financial adviser or super fund provider can explain this in more detail to you.
One of the benefits of an account-based pension is that as long as you draw down a minimum amount each year – an amount determined by your age and super balance – you can take as large or small an income as you wish.
Many people choose to draw down an amount that ensures they remain eligible for the Age Pension, effectively providing them with two income streams in retirement.
Another benefit of account-based pensions is that you can withdraw a lump sum at any time, which you cannot do with a TTR income stream. And, if you find you’ve overestimated your income needs, you can roll money back from your income account to your super account at any time so that it can be reinvested.
Different super fund providers offer different income stream products, and your provider will be able to give you information on the requirements of its products, such as minimum transfers and withdrawals.
“If you don’t know where to start, speaking with your Industry SuperFunds adviser could help figure out how to best maximise your retirement,” Whiteley says.
“Industry super funds are run only to benefit members, working hard for you even in retirement.”
Article first published on Starts at 60 in February 2018.The information referred to may change from the date of publication and care should be taken when relying on such information.