Step 5: Accessing your super
You can't touch your super until you've reached your 'preservation age'. That ranges from 55 for people born before July 1, 1960, to 60 years of age for anyone born after June 30, 1964.
Once you've reached that age your super benefits may be taken as a lump sum, an allocated pension, a fixed-term pension, a life-expectancy pension, or a market-linked pension.
Many retirees take some of their superannuation as a lump sum, perhaps to clear debts and set aside emergency funds, before rolling the remainder into an income stream.
For many years, lump sums were treated more harshly than an income stream in tax terms, but the rules changed from July 1, 2007 – seek advice.
Of course, it still makes financial sense to keep money in the superannuation environment when you're only paying 15 per cent on any earnings and, in the pension phase, no tax. Invest that lump sum elsewhere and the earnings won't be treated so favourably.
Pensions and annuities
A pension is an income stream payable from a superannuation fund.
An annuity is an income stream purchased with a capital sum from an entity such as a life insurance company.
They are very similar in that both supply regular periodical payments – monthly, quarterly, half-yearly or annually. The main difference is the source of the payment.
There are four main types of income-stream pensions and annuities: allocated, lifetime, life-expectancy and term. (We'll use the term pension from now on, but take it to mean either a pension or an annuity.)
There's nothing to stop you having more than one type of income stream product and it's one way to spread your risk and to access the different advantages of each type. However, the more income stream products you have, the more you'll pay in fees and charges.
These are the most popular form of income stream because they offer the greatest flexibility – in particular, the withdrawal of lump sums. You might need this facility to access capital for an emergency, for example, or house renovations or even a holiday.
In addition there's flexibility in how much money you can receive each year.
With an allocated product, you get to choose how your money will be invested much as you would have done in your super fund.
However, allocated pensions and annuities are not guaranteed to outlive you.
Much will depend on their investment performance, how much you draw down each year and, of course, how long you live. It's a complex area, so you may need a financial planner to help you work out the income you should take based on your life expectancy and the capital you have.
And money accumulating in an allocated pension fund is subject to Centrelink's asset test for the age pension.
When choosing an allocated pension product, make sure it has a 'reversionary' income clause that allows your spouse to receive an income should you die. Alternatively, look for provision for the payment of a lump sum to your spouse upon your death.
Unlike an allocated pension, the regular income from a lifetime annuity is guaranteed for life. However, at the time of death any remaining capital is forfeited to the pension issuer.
Also, when you buy a lifetime income stream, you're basically transferring the investment risk to the issuer – there's no need to worry about investment performance. (But the flip side of not being exposed to poor investment performance is that you won't benefit from strong markets.)
Instead, the income you'll receive depends on the interest rates prevailing at the time you take out the product. If rates are low, your income stream will, in turn, be lower than if rates were higher.
You can usually arrange for the income to be indexed for inflation.
With a lifetime income stream, you can negotiate a guaranteed period – 10 years, say – during which income payments would be diverted to your beneficiaries should you die. Otherwise, payments simply end upon your death and there's no payout of capital.
Unlike an allocated pension, you can't withdraw lump sums should you need extra funds.
While lifetime products are guaranteed for however long you live, life-expectancy products are guaranteed for a fixed period based on your life expectancy at the time they are bought.
If you live beyond this predetermined age, there's no further payment. But if you die earlier than expected a reversionary clause can ensure your spouse continues to receive an income.
Obtain quotes from a number of issuers to compare the income levels on offer. As with lifetime products, the income will be determined by the level of interest rates at the time you take the policy out. And, again, there's no need to worry about investment performance (but you miss out on the good as well as the bad), and you can't access your capital.
With a fixed-term income stream, you choose the term – which can be anywhere from one to 25 years.
You're usually paid back part of your capital, and your beneficiaries will receive income if you die before the term expires.
Like the others, income is determined by the level of interest rates when you buy the product.
Term allocated pensions
A relatively new pension is the term allocated pension or TAP (also known as a market-linked pension).
This is a market-linked retirement income stream product similar to an ordinary allocated pension but with some added restrictions: you can't withdraw lump sums, the minimum and maximum limits on how much you can draw each year are linked to the term you've selected, and there's a limit on how much you can change your pension payments year to year – you can increase or decrease the amount you're receiving by no more than 10 per cent a year.
Their big advantage is that, unlike an ordinary allocated pension, they're exempt from Centrelink's assets test for the age pension.
Your super benefits may be taken as:
- a lump suman allocated pension
- a lifetime pension
- a fixed-term pension
- a life-expectancy pension
- a market-linked pension.
Advisory: Superannuation law is notoriously complex and subject to frequent change, so the information below can be only general in nature. A number of Federal budgets over the last few years have included some major changes to the rules surrounding super. Talk to a superannuation adviser to see how the rules apply in your individual circumstances.