We spend decades watching our super balances grow, but for those thinking about retirement in the next few years, it can be unclear how best to use your super.
Here are some of the considerations for the popular options.
Easing into retirement
You can keep working and receive regular payments from your super when you reach your super preservation age (55 to 60, depending on your date of birth) and are under 65.
Using a transition-to-retirement income stream allows you to reduce your working hours while maintaining your income. To take advantage of this option, you must use a minimum of 4% and a maximum of 10% of your super account balance each financial year.
A transition-to-retirement strategy is not for everyone, and navigating the rules can sometimes be complex. It’s important to get independent financial advice to ensure this is your best option.
Here, we outline the pros and potential cons of the transition-to-retirement strategy for you to consider –
Pros
- A transition-to-retirement strategy allows you to ease into retirement by working less but receiving the same income, using the income stream to top up your salary.
- If there is spare cash each week or month, you can make extra contributions to boost your super, perhaps by salary sacrifice if that suits you.
- There are tax benefits. If you are above 60, the transition-to-retirement pension payments are tax-free (although the earnings in the fund will continue to be taxed).
Cons
- For people between 55 and 59, the taxable portion of the transition-to-retirement pension payments is taxed at your marginal tax rate. However, you will receive a 15% tax offset.
- Withdrawing money from super reduces the amount you have later for when you retire.
- It could affect any Centrelink entitlements you may have.
Taking a retirement pension
Retirement pension is the most common type of retirement income stream. It provides regular income once you retire, and you can take as much as you like as long as you don’t exceed the lifetime limit, known as the transfer balance cap.
Below, we outline the pros and potential cons of a retirement pension for your consideration –
Pros
- While there is a minimum amount you need to withdraw each year, there is no maximum amount required.
- There is a lot of flexibility – you can receive pension payments weekly, fortnightly, monthly or even annually.
- You can still choose to return to work, and it won’t affect the income stream that you have already commenced.
Cons
- The account-based pension could affect your Centrelink entitlements.
- There could be a potential challenge that the amount in your super to draw on might not last as long as you need.
- The transfer balance cap limits the amount you can use for your pension.
Withdrawing a lump sum
Once you have met the working and age rules, you can take your super as a lump sum or a combination of pension and lump sum payments.
Withdrawing a lump sum also has pros and cons, see our summary outlining these below –
Pros
- Withdrawing a lump sum allows you to pay off any debts to help relieve any financial pressures.
- It allows you to make an investment outside super in a property, for example.
- You pay little or no tax if you are 60 and older.
Cons
- If you use the lump sum to invest, you may pay more tax.
- Reducing your super balance now means less for later.
- Receiving a lot of money at once may encourage you to spend more than you need.
Access to SMSF funds
There are a few additional challenges to consider for those with self-managed super funds (SMSFs). For example, you will need to carefully check your Trust Deed for any rules or restrictions for accessing your super and consider how your fund can meet pension requirements if it holds large assets that are not cash, such as a property. It is essential to consult with your financial planner to understand your circumstances.
Next steps
Choosing the best approach for your retirement income can be overwhelming. Speaking with your trusted local Nexia Australia Adviser to discuss your options and advise on the best strategy suited to your future plans and lifestyle can be your key to a happy and fulfilling retirement.
