By the time you retire, you should have hopefully saved enough in your superannuation to enjoy a comfortable lifestyle. However, how you decide to access your super can significantly impact your retirement experience.
Many Australians opt to take their super as a lump sum, while others prefer a steady income stream through an account-based pension. Depending on your specific situation, you might even consider a mix of both options.
Understanding when you can access super
You’re eligible to access your super upon meeting certain conditions, including:
- Reaching age 65, regardless of your employment status
- Attaining your preservation age (between 55 and 60, depending on your birth date) and either permanently retiring or initiating a transition to retirement (TTR) income stream while continuing to work
- Ending an employment relationship after turning 60
- Meeting criteria for early access, such as financial hardship or medical expenses
Options for withdrawing your super
The following options apply to accumulation style superannuation funds. Other superannuation funds, such as defined benefits, may have different options and we encourage everyone to seek financial advice before accessing their superannuation funds.
Lump sum withdrawals
Your super fund may permit withdrawing your super in lump sums. This option could be appealing if you have significant debts, wish to make large purchases or invest elsewhere. Once withdrawn, the funds are no longer bound by super taxation rules, meaning potential earnings from these funds will likely be taxed differently and must be reported in your tax filings.
Planning is crucial with this option, as you’ll need to ensure your savings last throughout retirement. Creating a retirement budget or consulting a financial adviser can help you manage your funds wisely. Be mindful of potential tax implications, especially if you’re under 60 or if your super includes untaxed elements. Also, reconsidering and wanting to return the funds to your super may not be an option later.
Starting an account-based pension
For a continuous income during retirement, you might start an account-based pension. This converts your super into regular payments, while your fund continues investing the majority of your balance. You have control over payment amounts, frequency, and investment choices.
The government mandates minimum annual withdrawals from your pension to ensure you use your retirement savings. These requirements range from 4% (under age 65) to 14% (age 95 and above). Provided you comply and your pension doesn’t surpass the transfer balance cap, your pension account’s earnings are generally tax-free, and payments are tax-exempt for those over 60.
However, market volatility can affect your pension’s stability, so consider how fluctuations might impact your income.
Starting an Annuity
Similar to an Account Based Pension, an Annuity pays a regular pension payment to assist with your living expenses. These amounts are set at the outset and can be increased for inflation or remain constant. There are a variety of annuity options, for example, some pay an income for your entire life whilst others for a set number of years. Annuities provide stability and certainty throughout retirement. For this stability, there are numerous terms and conditions including potential restrictions on withdrawing funds. Given these complexities, we encourage anyone considering annuities to seek professional financial advice before investing.
Leaving your super untouched
Some retirees choose to leave their super in the accumulation phase, allowing it to continue growing. In this phase, earnings are taxed at up to 15%, though tax offsets and discounts may apply, potentially lowering the effective tax rate.
Yet, this might not be the most tax-efficient strategy since earnings in the retirement phase are usually tax-exempt.
Transitioning to retirement
For those nearing retirement but not fully ready to retire, a TTR pension could be beneficial. It lets you reduce your work hours without impacting your income significantly by supplementing it with your super. This involves moving some of your super into a TTR pension while the remainder continues growing, potentially with employer contributions.
Earnings in a TTR pension are taxed at 15%, and if you’re between 55 and 60, the pension payments are taxed at your marginal rate minus a 15% offset. Payments become tax-free once you turn 60.
What’s the best strategy for accessing super in your retirement?
These strategies represent various ways Australians can utilise their super. It’s important to carefully consider each option and consult a financial adviser to determine the best path for your specific needs and circumstances.
Learn more about APS Financial Planning.
Written by APS Senior Financial Advisor, Paul Hatzigeorgiadis.
Paul has over 25 years of experience in the financial services sector. Over Paul’s history, he has provided advice to an extensive range of clients from wealth accumulators to pre and post retirees advising them on Wealth Creation, Cash Flow Management, maximising Centrelink benefits in Retirement, Personal Insurances, Debt minimisation strategies and Superannuation. Paul is married with a 12-year-old daughter and enjoys spending time with family and friends. Whether it’s assisting clients to meet their short-term goals or working with them over a longer term, Paul enjoys helping guide his clients with their financial future.