Choosing a retirement income product
As you approach retirement, you need to decide how to use the superannuation you've saved to help support yourself in retirement. Retirement income products let you turn your superannuation into regular income payments. Choosing a retirement income product can be daunting and the products can have difficult, unfamiliar names. Types of retirement income products
Retirement income products are a very important way to make sure your money lasts as long as you do. They are about your quality of life and whether you will have enough money to live on. An important question to ask yourself is: Will your money last as long as you do?
Getting advice
Centrelink's Financial Information Service (FIS) can give you free and impartial information about your options at retirement. You don't need to be a Centrelink client to benefit from this service. Many people need professional advice from a licensed financial adviser with expertise in retirement and tax planning. See Getting advice
Accessing Government Benefits
| Even if you cannot get a full age pension, you may qualify for a part age pension. |
| Tax free super benefits | If you are 60 years of age and receive pensions or lump sums from a taxed superannuation fund do not pay tax. |
| Having money for major expenses and emergencies | Ensure you keep some money aside for a rainy day. Think carefully before locking up all your money in products that might leave you struggling to find money for major expenses and emergencies. |
| Leaving something behind | Making special arrangements when you choose a retirement product can help ensure that your spouse, dependents or estate are looked after. |
| Living with investment risk | When you stop working, your savings (and possibly an age pension) are all you've got to live on. You'll need to find the right balance between protecting your capital and earning enough from them to keep up with the cost of living. |
Accessing Government Benefits
To get either a full or part age pension payable by the Australian Government, your income and your assets must be less than certain amounts set by Social Security Laws. Centrelink's Financial Information Service can tell you about the income and asset test rules, help you understand how they apply to different retirement income products and assist you maximise your overall retirement income.
The pension assets test taper rate (ie the amount by which age pension entitlement is reduced depending on the value of your assets) is $1.50 per fortnight for every $1,000 of assets above the relevant threshold.
If you cannot get a full age pension, you may qualify for a part age pension under the new changes. This can still be valuable because you may receive concessions (for example, on the cost of prescription drugs, transport, utility bills etc). If you do not qualify for any age pension you may still be eligible for some fringe benefits under the Commonwealth Seniors Health Card if your income is below a certain amount.
Tax free super benefits
Superannuation benefits paid from a taxed source (ie a superannuation fund that has paid tax, which includes most superannuation funds except public sector superannuation funds) as a lump sum or pension is generally tax free when paid to people aged 60 or over.
The Tax Office website explains how superannuation benefits are paid and how these benefits will be taxed, see How your super payout is taxed
If you keep your retirement savings inside a superannuation fund that pays you a retirement income as a pension, then any investment earnings on the assets that support the pension are tax free to the fund. This can assist in making your superannuation savings last longer.
Having money for major expenses and emergencies
Make sure you can cover capital expenditure like replacing major household appliances, buying a new car, and repairing and maintaining your home. You may even need renovations to meet your changing needs.
If you're thinking of keeping some savings or investments outside super, you'll need to weigh up any age pension and tax disadvantages with the peace of mind it might give you.
You could consider putting at least some of your money into retirement income products which allow you to draw out capital from the account that pays your superannuation pension. Keep in mind, though, that large and sudden withdrawals can cause age pension complications. Any withdrawal also means you will have less money in the account to pay you an income over the long term.
Finally, you may be able to borrow money for unexpected expenses. With standard loans, you'll need enough income at least to cover your repayments. With reverse mortgages, you can put off any repayments by allowing repayments to build up against the original loan. This can sound attractive and easy, but when you eventually sell your home, you could end up with much less left over (and you might also find yourself worrying more at night!)
Leaving something behind
Do you want to leave money to your spouse, partner, children or anyone else when you die? First of all, make sure your will is a valid legal document and up to date truly reflecting your wishes.
Making arrangements for your home, personal effects and other assets is usually be straightforward. However, there are income streams which may need special estate planning arrangements.
You can arrange to have the income stream continue for your spouse after you die and for your dependants or estate to receive an amount representing the value of the income stream as if it had continued to be paid to you for the remaining period. Making these types of arrangements when you buy such income streams can help ensure that you leave something for your dependants, for example.
Living with investment risk
When you stop working, your savings (and possibly a pension) are all you've got to live on, so protecting your savings becomes very important, especially if you're on a tight budget. But the cost of living keeps rising, and you wouldn't want to find yourself short of money in 10 or 15 years. So you'll need to find the right balance between protecting your savings and earning enough from them to keep up with the cost of living.
Some retirement income products allow you to choose and benefit from a variety of investment choices. These choices are probably similar to the investment choices you may currently have with your superannuation fund. However, with these products, your income and your savings aren't guaranteed. If the market drops or turns sour for a few years, your money may run out sooner.
Other retirement products can give you a more secure income. These products include 'lifetime pensions and annuities' and 'life expectancy pensions and annuities'. While the security may be appealing, you may pay a higher price for these products, compared with non-guaranteed products. And if the market rises and runs strongly for a few years, you won't benefit from it, because your annual income is locked in.
FIDO Website: Printed 08/21/2008
