18 Sep How do retirement income options compare?
Retirement is filled with opportunities and choices. There’s the time to travel more, work on long-delayed personal projects or volunteer your help to worthwhile causes.
You also have a host of choices to make when it comes to funding your new life away from paid work including whether you want to set up a pension or take a lump sum from your superannuation account.i
Here are the pros and cons of five different ways of achieving an income in retirement.ii
Account-Based Pension
An account-based pension (ABP) is one of the most common retirement income options. Usually, if you have met a condition of release after age 60, you convert your superannuation balance from the accumulation phase into an ABP, which provides regular income payments. The amount you receive depends on the balance of your account and the drawdown rate you choose, subject to the minimum pension requirements set by the government.
Some considerations:
Tax benefits: Investment earnings, capital gains and withdrawals are fully tax-free in this pension phase, unless you have an untaxed component within your super.
Payment flexibility: Subject to pension minimums, most super funds allow you to adjust the payment amount and frequency, and even make partial or full lump-sum withdrawals if needed.
Ability to work: After an ABP is commenced, you can choose to return to work while continuing to receive the ABP.
Minimum pension requirement: There’s an annual minimum payment rate, otherwise the ABP will cease for income tax purposes.
Longevity Risk: There’s a risk that you might outlive your account balance, especially if your withdrawals are high or your investment returns are poor.
Market Risk: Your income depends on the performance of your investments, so a market downturn can affect your balance and income.
Transition to Retirement
A transition to retirement (TTR) strategy allows you to access some of your superannuation while still working, if you have reached age 60 (based on current rules).iii
Some considerations:
Flexible work options: You can reduce your working hours and supplement your income from your superannuation.
Boost to cashflow: Even if you continue working full-time but require funds to assist in living expenses or reducing debt, this additional income can add a boost to your cashflow.
Limits on pension rates: Similar to an ABP, there is a minimum annual pension rate. However, there is a maximum limit too. You cannot withdraw more than 10 per cent of your TTR account balance each year.
Reduced retirement savings: Drawing on your superannuation while still working means your retirement savings might grow more slowly.
Taxation: While the TTR income is tax-free, income and capital gains within the TTR account still attract a 15 per cent tax rate, similar to your accumulation account.
Lump sum withdrawal
Assuming you’ve met the legal and super fund requirements, you can withdraw a lump sum from your super.
Some considerations:
Immediate access: Provides a large amount that can be used for significant expenses or investments.
Flexibility: You have full control over how you use the lump sum, including investing it or using it for major purchases.
Risk of loss: There’s a risk that you may deplete your funds too quickly, especially if the lump sum is not managed carefully.
Potential for poor investment decisions: Without a structured plan, there’s a risk of making poor investment decisions or spending excessively.
Annuities
An annuity is a financial product that provides a guaranteed income for a specified period or for the rest of your life. There are various types of annuities, including fixed, variable, and indexed annuities. You can purchase annuities or lifetime income streams using your superannuation.
Some considerations:
Predictable income: Provides a stable and predictable income stream, which can be reassuring for financial stability.
Longevity protection: Lifetime annuities ensure you receive income for as long as you live, addressing the risk of outliving your savings.
Lack of flexibility: Once you purchase an annuity, the terms are generally fixed and you cannot alter the income amount.
Capital is locked away: The ‘cost’ of a guaranteed income stream is a restriction on capital withdrawals or in some instances no access to capital at all.
Inflation risk: Fixed non-inflation-linked annuities may not keep pace with inflation unless specifically indexed to inflation.
Innovative Retirement Income Stream
An Innovative Retirement Income Stream (IRIS) is provided by a newer range of products. These were introduced after changes to regulations designed to deliver more certainty to retirement income by paying a pension for life without running out of funds.
Some considerations:
Age Pension benefits: Centrelink only counts 60 per cent of the pension payments received as assessable income and only 60 per cent of the purchase price of the product counts as an assessable asset until age 84 when it is reduced.
Certainty: Some IRIS products offer a stable guaranteed income stream, which can provide financial security in retirement while others are designed to account for market exposure into future payments.
No minimum requirements: Unlike some other types of income streams from super, IRIS products do not require an annual minimum amount, instead just requiring at least one payment is made each year.
Newness: Being a relatively new option, IRIS may come with uncertainties regarding long-term performance and stability.
Complexity and availability: Specific features vary widely between different IRIS products and may involve complex terms or conditions.
Next steps
How do these different options suit your personal needs and what impact does it have on your retirement income? Consulting with a financial advisor can help you navigate these choices and tailor a plan that best suits your needs. Speak to us, so we can help you structure a plan to fund the retirement lifestyle you’ve worked so hard for.
How much do you need?
The Association of Superannuation Funds of Australia’s estimate of how much money you’ll need in retirement (assumed to start at age 65), depending on your lifestyle.
| ASFA Retirement Standard | Annual living costs | Weekly living costs |
| Couple – modest | $47,387.00 | $911.28 |
| Couple – comfortable | $72,663.00 | $1,397.36 |
| Single – modest | $32,915.00 | $632.98 |
| Single – comfortable | $51,630.00 | $992.88 |
Source: ASFA Retirement Standard, March quarter 2024iv
i Retirement withdrawal – lump sum or income stream | Australian Taxation Office (ato.gov.au)
ii Planning to retire | Australian Taxation Office (ato.gov.au)
iii Transition to retirement | Australian Taxation Office (ato.gov.au)
iv ASFA Retirement Standard, March quarter 2024 – The ASFA Retirement Standard – ASFA The Voice of Superannuation since 1962
This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.
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About Reuben Zelwer
Reuben Zelwer established Adapt Wealth Management in 2011 to help time poor clients achieve financial freedom. For over 15 years, Reuben has helped professionals, executives, business owner and those approaching retirement make the most of their circumstances by making good financial decisions. Reuben’s professional practice is complemented by substantial voluntary work, which has included setting up financial literacy and savings programs in the local community. |