One of the challenges we face in retirement is the need to replace the regular wage or salary earned during our working lives, with other – and hopefully regular – sources of income.
Around 77% of Australians aged over 65 receive all or part of the age pension 1, so this income support continues to play a role in retirement plans. However, in many cases pension payments are combined with additional forms of income in a mix and match approach.
keep a hand in the workforce
Rather than make an abrupt transition from worker to retiree, many Australians gradually wind down their working work over a period of years. Opting for part-time work doesn’t just extend your working life, it can smooth the transition from ‘worker’ to ‘retiree’, and give your super a valuable last minute boost through employer-paid contributions.
The federal government is keen to encourage us to work for longer, and financial incentives are available to those who delay retirement. Workers aged over-55 for instance, may be eligible to claim the Mature Age Worker Tax Offset – a tax saving worth up to $500 annually.
If you’re eligible for the age pension,the government’s Work Bonus scheme is another good incentive to keep your hand in the workforce. Under the scheme up to $250 of fortnightly employment income is excluded from the age pension income test.
use your super to wind down
The downside of scaling back your working work is a leaner pay cheque, however, from age 55 it is possible to access your super and supplement your working wage with a ‘transition to retirement’ pension (TRP).
TRP’s are only available as a regular income stream. The money cannot be drawdown as a lump sum, and no more than 10% of your super balance can be withdrawn through a TRP in a single year.
The downside of TRPs is that you will have less in super when full time retirement rolls around. For this reason it important to seek professional financial advice if you are consideringa TRP, to determine the maximum you should drawdown today in order to minimise the impact on your retirement lifestyle tomorrow.
invest in an income stream
One of the appealing aspects of superannuation is that we can access our super savings tax-free from age 60. There are no restrictions on how, and how much, we can withdraw from super at this stage but as super is a low tax environment, it’s worth resisting the urge to drawdown a lump sum unless it’s absolutely necessary (for example, to pay debts including paying out a mortgage).
Your super savings can be used to purchase a ‘private’ pension or retirement income stream. These keep your money in the tax-friendly super environment, while providing a regular income much like a wage or salary, with payments comprised of your initial capital plus the return on your investment.
1. ABS life expectancy. http://www.abs.gov.au/AUSSTATS
There are essentially two types of private pensions available – an account based (or market linked) pension and a non-account-based pension. Both are offered by large financial institutions like super funds and insurance companies, but there are noteworthy differences between the two.
Account-based pensions are purchased using a lump sum from your super. You can nominate the underlying assets your money is invested in as well as the frequency of your income payments, be it monthly, quarterly or six-monthly, with the added freedom to drawdown lump sums.
There is no maximum amount of capital that must be drawdown from your pension fund each year, but you are required to withdraw a certain minimum amount of capital. The downside of this flexibility is that it is possible to exhaust your market-linked pension at an early stage – either by drawing down too much, or through poor or negative investment returns on the underlying assets.
Non-account based pensions work a bit differently. These are also purchased with your super savings to provide a regular income – in fact, with this type of pension, your income is guaranteed for life regardless of how investment markets perform. The trade-off for this certainty is less flexibility. Your annual payments may increase in line with inflation but they can’t otherwise be changed – and you don’t have the freedom to make lump sum withdrawals.
the choice is yours
Your choice of income in retirement will be shaped by a range of factors including your super savings, your nonsuper assets and the age at which you plan to retire. The important thing is to make the most of the resources available to you.
That’s where quality financial advice can make a valuable difference. A skilled financial adviser can identify opportunities for you to maximise government entitlements, help you select investments best suited to your needs, and importantly, show you how to make your retirement savings last longer.
Talk with an ipac adviser today to find out how you should be funding your income in retirement.