David Gray* takes a look at the pros and cons of account-based pensions when it comes to retirement and examines how they work to help readers decide if it could be right for them.
So, you’ve put savings into your super and it’s time to retire. What happens next?
Well you have a few different options for drawing an income from your savings and having an account-based pension is one of them.
Here’s a quick guide to how they work and some questions to help you decide if it’s the right approach for your retirement ……..
When the time comes for you to retire, you’ll have access to the savings in your super fund.
So, what should you do with your super money?
One option is to use your super to start an account-based pension.
How do account-based pensions work?
With an account-based pension, your pension provider will invest your money and provide you with regular pension payments monthly, quarterly, half-yearly or annually.
You’re required to withdraw a minimum amount each year depending on your age and your account-based pension will last until your balance is exhausted.
What are the benefits?
Account-based pensions can be a good way to make your investment earnings and retirement income more tax efficient.
This is because:
In the retirement phase, your investment earnings won’t be taxed;
You won’t pay any tax on pension payments from age 60;
From age 55 – 60 depending on your date of birth, any tax you pay on your pension income will be at your marginal tax rate less a 15% tax offset.
You also have flexibility around the money in your account-based pension.
You can change the frequency of your pension payments, change the amount of your withdrawals (subject to a minimum annual amount) or take a lump sum.
You can also choose how your money is invested based on the investment options offered by your provider.
Are there any drawbacks?
Account-based pensions are a flexible, tax-effective way of drawing an income from your retirement savings.
On the other hand, they’re not providing you with a guaranteed income for the rest of your life. That’s because neither your life span or your investment returns are certain.
Your investment income will depend on market performance, so your account-based pension balance won’t be growing as fast when markets underperform.
Or if you invested in a safe option such as cash, may not keep pace with inflation so your purchasing power may reduce over time.
There is also the possibility that you may outlive your money.
Once your balance gets to zero, your pension payments will stop.
What about the Age Pension?
Whether you’ll receive Age Pension payments from Centrelink, and how much you’ll be paid depends on your eligibility.
It’s worth remembering that an account-based pension is assessed when you apply for the Age Pension.
Is an account-based pension right for me?
So, there’s a lot to weigh up when you’re looking at this option for funding your retirement.
To help you make the decision, it’s worth asking the following questions about your circumstances:
How much income do you need?
How stable is your health and family history?
How could the payments impact estate planning?
What are your plans for your life in retirement?
How could financial markets, tax or Centrelink benefits influence your decision?
If you’re a member of a public sector superannuation scheme your options for accessing your super at retirement may be different and your decision can have a significant impact.
A financial planner can assess your individual circumstances and explain your options to you.
Take the next step
With the right help, planning for your retirement is easier than you think. For more expert tips, visit the StatePlus website at this PS News link.
* David Gray is a registered financial adviser with StatePlus and can be contacted at [email protected].
StatePlus, formerly State Super Financial Services, is one of Australia’s leading providers of financial planning. Since 1990, our retirement experts have provided life changing financial advice to public sector employees and their families. With a StatePlus planner by your side, you can feel confident about reaching your financial goals to live the retirement you really want.
This article was published in July 2018. The information in this article is current at the time of writing the article. This is general information only and does not take into account your personal objectives, financial situation or needs. It is important to seek financial and taxation advice that takes into account your personal objectives, financial situation and needs before making any decisions based on this information.