When you reach retirement and can access your super, you face an important decision: should you take your super as a lump sum, set up a regular income stream, or use a combination of both? This choice affects how much tax you pay, how much government age pension you receive and how long your retirement savings last.
Super lump sum withdrawals
Taking a lump sum means withdrawing some or all of your super in one or more payments. Once you take money out as a lump sum, it’s no longer considered super. If you invest that money outside of super rather than spending it, any investment earnings won’t receive the tax benefits that super enjoys and you may need to declare the earnings in your tax return.
Lump sums offer flexibility, but you risk spending too much too quickly and running out of money later in retirement.
Super income streams (pensions or annuities)
A super income stream involves receiving regular payments from your super fund or annuity provider, paid at least annually. You may prefer an income stream because they help manage spending and provide ongoing income throughout retirement. Some income streams are also better for maximising your government age pension entitlement.
The tax advantages can also be significant. When you transfer super into a super income stream, your super fund doesn’t pay tax on investment earnings in that account as long as the income stream operates correctly.
Account-based pensions
An account-based pension is a simple type of super income stream you may use to gradually draw down your super savings. Your super fund continues to invest your money according to your investment choices and adds investment returns (or subtracts losses) to your account. Your balance fluctuates with market performance, but you benefit from tax-free investment earnings.
You must withdraw a minimum amount each year, however, you can withdraw as much as you like above this minimum and also take out lump sum amounts when needed.
There are many different types of income streams available, so it is best to explore the best option for you with your adviser.
Limits on the amount you can transfer to an income stream
A lifetime limit exists on how much you can transfer into tax-free super income streams. This limit is currently $2.0 million if you are starting your first income stream.
Tax treatment differences
If you’re aged 60 or over, payments you receive from an account-based pension are generally tax-free, whether taken as lump sum withdrawals or regular pension payments. Lump sum withdrawals from the accumulation phase of super are also tax-free for over 60s.
The big tax difference applies to your remaining super balance. Investment earnings on your balance in an account-based pension are tax-free, making your retirement savings last longer. However, if you simply leave your remaining super balance in the accumulation phase, investment earnings will be subject to 15% tax in the fund.
Making the right choice
The decision between lump sums and income streams depends on your individual circumstances, including your age, other income sources, whether you qualify for government benefits and how you prefer to manage your money.
Many retirees find that a combination works best – you can take some super as a lump sum for immediate needs while setting up an income stream for ongoing expenses. It’s worth consulting with your professional tax adviser or financial adviser to discuss your retirement strategy.
