The current turmoil on world share markets is bad news for all investors. But it’s especially unwelcome if retirement is looming on the horizon.
The lead up to retirement is the time to think about how to get the most from your superannuation savings. Around 80% of working Australians have their super invested in a balanced fund, which typically holds around 70% of its investments in shares. This being the case, your super will be feeling the brunt of today’s share market volatility. However there are good reasons to keep your nest egg in the superannuation environment once you retire.
Taking your super as a lump sum may be helpful if you need to pay off debts like your home loan. But using the money to invest in, say, term deposits or other non-super assets, doesn’t make sense because you’re shifting money out of a very tax-friendly environment and into a far higher tax environment.
Another option is to use your super to purchase what’s called an ‘account-based’ pension.
Investing in one of these pensions, previously known as allocated pensions, involves swapping a lump sum of super for a regular series of payments. It provides an income stream much like the wage or salary you’ve earned during your working life, usually with options to receive payments monthly, quarterly or annually.
Investors have the freedom to access lump sum withdrawals and you can broadly choose where your money is invested. However one of the key benefits of this type of investment is that your money remains in the super system, and that means valuable tax savings. If you’re aged 60 or over, payments from an account-based pension are tax-free.
But there are drawbacks. The amount you can withdraw annually must fit within government guidelines. And importantly, your pension account can be prematurely exhausted – either by drawing down too much money each year, or if the underlying investments generate poor returns.
That can make account-based pensions something of a juggling act. Choosing a share-based pension can mean your investment enjoys healthy long term returns. Though as we’ve seen in recent weeks the share market can be extremely volatile, dishing up substantial gains – or losses – over the short term.
On the flipside, underpinning an account-based pension with more conservative investment choices may not provide the long term capital growth your money needs to last through retirement.
An additional challenge is the sheer number of account-based pensions available. There are over 350 superannuation funds and the majority offer account-based pensions – many being sold under exotic marketing names.
To help retirees cut through the clutter, research group Canstar Cannex has compiled a rating of account-based pension funds, which you can download by clicking here.
While the Canstar report is a useful starting point, the decision on how to invest your super savings is critical to the quality of your retirement. Seeking professional advice is something I would urge all pre-retirees to consider – super is a complex area and as you enter retirement you want to make sure you’re on the right financial track.