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Busting a big super myth: You don’t have to cash out your balance to create an income

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  Published: 04 Apr 2019

The term 'lump sum' has been around since the days when Aussies retired with only a few thousand dollars in super - but that's far from the case these days.

Before superannuation was widespread, all you got from the boss when you retired was a gold watch … if you were lucky. You might have had some savings tucked away in a bank account, and probably qualified for the Age Pension.

Then super came along and in the early days at least, many people took their superannuation benefit as cash at retirement. Hence the term ‘lump sum’, which we’re still stuck with today.

Some people still think that when work finishes, so does your super, and you need to take the entire amount as cash – it’s one of those enduring myths that won’t go away.

Let’s go myth-busting!

These days, you can leave your super in your fund when you retire if that’s what you prefer to do. That’s what most Australians currently do. Research from the Productivity Commission found that only about 16 per cent of Australians drew down a lump sum at retirement, and in most cases, the typical value of those withdrawals comes in at around $20,000.

That’s because if you have a low balance, it may indeed be sensible to use the money to fund home repairs or pay off debts before you settle into living on the Age Pension. Centrelink doesn’t treat a super lump sum as income when it comes to calculating your pension entitlement, although you do need to let Centrelink know that you’ve received the lump sum.

But if, like most retirees, you’re looking to invest in an income stream to top up or entirely replace the pension, you don’t need to move your money from your existing super fund to somewhere else, such as a term deposit account or an annuity provider, to create it.

The idea that people coming up to retirement need to look for a different provider to set up a retirement income stream is a myth worth busting, Gemma Pinnell, director of strategic engagement at Industry Super Australia, says.

“So many people aren’t aware that when they reach retirement, they don’t need to take their superannuation out as a lump sum,” she says. “Most superannuation funds – including Industry SuperFunds – offer income stream products.”

Just as most people are able to choose their own super fund, you can choose any income stream provider you prefer when you retire. But Pinnell warns that you should look carefully at your options before you make a decision, including putting the returns, fees and charges of your prospective fund under the microscope.

Not all super funds are created equal

“It’s important to consider whether all the profits are delivered to members or whether part of the profits go to shareholders,” Pinnell says. “Also consider the fees associated with the account and, of course, what their returns have been previously.”

She adds that Industry SuperFunds already have the runs on the board.

“There are a lot of superannuation funds out there, but people can rest assured that if they’re with an Industry SuperFund, they’re with a fund that’s run to benefit them, with low fees, and a proven outperformance record compared to retail or bank-owned funds.”

(However, remember that return rates can vary from year to year, depending on a fund’s investment performance, and that past performance is not a reliable indicator of future performance.)

If you’re doing your own research, for each fund you look at you’ll need to consider what the fees and charges are, whether there’s a wide range of investment choices and if investors with lower super balances are welcome to join.

Checking the small print

Most of that information you require to compare funds is contained in each fund’s product disclosure statement (PDS) and you could also look at some of the online comparison sites that will give you a summary of the fees and charges of various funds. Industry SuperFunds offers a free, online comparison tool that allows you to match its member funds against a wide variety of retail funds to see how they compete on performance, fees and other key factors.

Don’t forget to look for all the sneaky hidden charges as well – some funds charge entry fees, exit fees, withdrawal fees and allow for ‘advisor service fees’ that can be more than 1 percent of your super balance alone. In fact, if you add up all the fees charged by some of the retail funds, it could end up costing you more than 2 percent in total.

“When considering investment returns, be sure to consider what the net benefit return is, after fees are taken out,” Pinnell says.

If downloading and reading dozens of product disclosure statements isn’t your idea of fun, then it’s a good idea to talk to a professional who has your interests at heart.

“It’s always sound advice to speak to a financial adviser when making any big retirement decision,” Pinnell suggests. “Your Industry SuperFund has financial advisers who can assist you with the big decision of what to do with your retirement savings, free of charge.”

A note of caution

Every year, thousands of Australians just like you retire. Between them, they have billions of dollars in superannuation savings. Not surprisingly, there are plenty of people who’d love to get their hands on that honeypot. They’re not always going to act in your best interests.

Nobody cares about your retirement more than you; you want your savings to help fund a great retirement, not fund somebody else’s lifestyle. So, if somebody tells you to ‘cash out’ your super lump sum or recommends you take your money out of a great-performing fund and invest in a high-fee fund, look before you leap.

And remember that unlike retail funds, Industry SuperFunds only exist for one reason – to look after the interests of members.

Did you take a lump sum, create an income stream or choose a mix of both when you retired? Are you happy with your choice?

This article was first published by Starts at 60 on 4 April 2019. The information referred to may change from the date of publication and care should be taken when relying on such information.

*The above material, whilst correct at the time of publication may include references or statements which are no longer current.

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