Key takeaways:
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Many retirees choose to access their retirement income via an account-based pension because it offers a flexible and tax effective income
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Annuity pensions guarantee a set income no matter how investment markets perform. This is something you don’t get with an account-based pension
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A Transition to Retirement pension enables you to access your super before you retire, once you’ve reached your preservation age.
Being able to finally access your super, which has taken decades to accumulate, is a memorable day for most. But there are a number of ways you can do this so it’s important to determine which is best for you.
Tax savings is one of the main benefits of drawing your retirement income from super. Depending on the approach you take, any lump sum or pension payments you receive from your super is generally tax free from age 60 (from a taxed super fund).
In this article we look at the different types of retirement pensions available, including some of the areas to consider before choosing one.
Account based (or allocated pension)
Many retirees choose an account-based pension because it offers a flexible and tax effective income.
When you meet a condition of release such as retirement, meaning you’ve reached your preservation age (between 55 and 60 depending on your date of birth) and ceased employment, you can set up an account-based pension.
This gives you many options including being able to choose:
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how much you want to transfer from your super into your pension account
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the frequency of your payments (subject to a minimum of once per year)
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how you want your money invested
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to withdraw some or all of your money at any time.
Considerations
One of the main drawbacks of an account-based pension is investment earnings are not always guaranteed and can fluctuate depending on the type of investments you choose.
This means if the market falls steeply, you could be at risk of running out of money unless you have other sources of income to rely on.
You’re also required to take out a minimum amount each year. This amount is calculated based on your age and will be a percentage of your account balance.
Currently, you can transfer up to $1.7 million into your pension. If you exceed this limit, you may have to transfer the excess into a separate super account or take the excess as a lump sum out of the super system.
Annuity pensions
An annuity pension pays a set amount of income for a specific period.
You can choose whether you want payments to last for a set number of years (fixed-term annuity) or over your life span (lifetime annuity). One of the major benefits of a lifetime annuity is it removes the worry of outliving your savings.
The money you receive from your annuity is purchased with your super money and is tax-free from age 60.
Annuity pensions guarantee a set income no matter how investment markets perform. This is something you don’t get with an account-based pension.
Your income can also increase each year by a fixed percentage or be indexed with inflation. This means you’re protected from the rising cost of living.
Considerations
These are some potential drawbacks of annuity pensions.
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You have no control over how your money’s invested–in the long run, it may pay lower returns
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You must withdraw your money as regular payments rather than as a lump sum
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Once your income payments start, you can’t change the amount you receive
Transition to retirement pension (TTR)
A TTR pension enables you to access your super before you retire, once you’ve reached your preservation age based on your date of birth.
1. Reduce your work hours
You can gently transition into retirement by remaining in the workforce but on a part-time basis. To maintain the same level of income, a TTR pension allows you to make up the difference in lost income from your super. And as you’re still employed, your super savings will continue to be contributed to as well.
2. Boost super and save tax
If you’re worried about not having enough money in retirement, a transition to retirement strategy can be a tax-effective way to boost your super. Under this option, you can remain in full time basis.
You do this by sacrificing some of your salary into super. Then you make up the shortfall in take home pay by accessing payments from your TTR account.
With a transition to retirement strategy, you get the advantage of saving income tax through salary sacrifice as well as tax concessions that apply to the income from your TTR account. When you turn 60 you won’t pay any tax on your pension income.
Considerations
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You can salary sacrifice up to $27,500 or higher (if you have unused concessional contribution from previous years and meet conditions), into super for the 2022/23 financial year
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If you’re 55 to 59, the taxable amount of your income from a TTR pension is taxed at your personal income tax rate, less a 15% tax offset (based on any taxable components)
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Generally, you can only access between 4% and 10% of your super each financial year, but until 30 June 2023 you may withdraw as little as 2%.
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At least one withdrawal must be made each year and generally you can’t access your super as a lump sum payment while still working
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Drawing down on super may reduce the amount of retirement savings you have left to fund your eventual retirement
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If you or your partner currently receive any social security payments, a TTR pension may affect your entitlements.
Government Age Pension
The Government Age Pension is a fortnightly income designed to help eligible Australians supplement their retirement savings. A number of factors play a part in determining whether you’re eligible to receive the Government’s Age Pension.
Age Pension rates
The amount you can receive from the Age Pension depends on a test which the government uses to assess your income and assets, and whether you’re single or in a couple.
The maximum amount you can receive as a single is $1,026.50 a fortnight or $26,689 a year (as at 20 September 2022). For couples, you can receive up to $1,547 a fortnight or $40,237 a year.
Age requirements
Currently, the qualifying age for the Age Pension is increasing by six months every two years until 1 July 2023 when the qualifying age will be 67. However, your Age Pension age may be under 67 depending on when you were born.
How is super assessed for the income test?
Super is seen as an income which is applied against the thresholds in the income test. Your super balance is added together with all of your other assessable income to calculate your Age Pension entitlements.
How much super can you have and still get the Age Pension?
If you own your home, you may still be able to get a part Age Pension. Singles can have up to $609,250 in super and couples can have up to $915,500.
If you don’t own your home, you can have up to $833,750 (singles) in super and up to $1,140,000 (couples).
Talk to us if you’d like to find out more.
Important information and disclaimer
This article has been prepared by NULIS Nominees (Australia) Limited ABN 80 008 515 633 AFSL 236465 (NULIS) as trustee of the MLC Super Fund ABN 70 732 426 024. NULIS is part of the group of companies comprising Insignia Financial Ltd ABN 49 100 103 722 and its related bodies corporate (‘Insignia Financial Group’). The information in this article is current as at October 2022 and may be subject to change. This information may constitute general advice. The information in this article is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider obtaining independent advice before making any financial decisions based on this information. You should not rely on this article to determine your personal tax obligations. Please consult a registered tax agent for this purpose. Opinions constitute our judgement at the time of issue. The case study examples (if any) provided in this article have been included for illustrative purposes only and should not be relied upon for decision making. Subject to terms implied by law and which cannot be excluded, neither NULIS nor any member of the Insignia Financial Group accept responsibility for any loss or liability incurred by you in respect of any error, omission or misrepresentation in the information in this communication.