If you’re about to retire or are in retirement, it can be tempting to take your superannuation as a lump sum payment. While you often can choose to withdraw some or all of your super in this way, you are taking your retirement savings out of a tax-friendly environment. If you intend to keep your lump sum amount for future saving or investment, consider your options first, as after a certain age you may not be eligible to make any further contributions back into superannuation.
An alternative is to use your super savings to purchase a retirement income stream, called an ‘account based pension’ or allocated pension. The earnings of an account based pension are tax-free, which means you enjoy regular cash flow in much the same way your wage or salary was paid during your working days. “In most cases once you have retired, you can still take lump sums from your account based income stream if and when needed,” Technical Expert at BT, Tim Howard says. “Keep in mind though, these lump sum withdrawals will reduce the amount you have saved in super and may therefore reduce the longevity of your retirement income stream.”
If you choose to leave your super savings in the superannuation environment, it is important to review the way in which your super is invested, annually. It can be tempting to switch all your super to more conservative investments as you approach retirement, but without some exposure to growth assets, such as shares or property, your super savings might not benefit from potential future growth, or last as long as you might think. Always consider your appetite for investment risk, otherwise known as your investor risk profile, before making any investment decisions.
Along with super, it’s likely you have other investments to draw on in retirement. It could make good financial sense to have part of your portfolio invested in growth assets, such as shares or managed funds with underlying growth assets. “Getting this mix right can be difficult, and requires ongoing reviews and adjustments when your circumstances, or that of the greater economy, change,” Tim adds.
The trouble is, growth assets don’t always deliver steady returns. Asset markets can fall and this may mean taking a hit to your capital. That’s why advisers might recommend having a few years’ worth of income tied up in less lively investments, such as high interest savings accounts. This strategy means you won’t have to dip into growth assets in times when markets are down, cementing a loss on investment that might otherwise recover their value over time. Determining the exact mix of investments in retirement can be a juggling act – more so because our needs and lifestyle change as we get older, calling for fine-tuning over time. It’s also an area where good financial advice can make a significant difference.
Depending on your assets and income, you may be entitled to receive a full or part-payment of the age pension. Even a small part-payment could see you entitled to a range of concessions, including discounts on council rates and other benefits.
If you are a home owner, your family home could be your most valuable asset – worth more than even your superannuation. Your home equity can provide a potential source of funds in retirement, and you may not have to sell up or move in order to benefit from that equity.
Along with super savings, your home is likely to be one of your most valuable assets and there are ways to access home equity in retirement.
One option is by downsizing – this involves selling your home and moving to a cheaper property and using the remaining profit from the sale as funds to live on. “From 1 July 2018, the government introduced a new type of contribution allowing eligible individuals from age 65 to contribute up to $300,000 from the sale proceeds of their home into super as a downsize contribution,” Tim says.
A second option is a reverse mortgage. This is a financial product that works like a regular mortgage, but in reverse. It’s basically a loan secured by your home, but instead of making payments, the lender pays you a lump sum or you may be able to draw regular payments. No repayments are necessary until you sell up, or pass away, though the loan does start accruing interest from day one.
A reverse mortgage can be a great option for retirees who are asset rich and cash poor, however, it will impact the value of your estate, so it is something worth discussing with your family and adviser.
Another option, to give your retirement income a boost, is returning to work on a part-time basis, or even doing some consulting or interim work. The added bonus here, is that more money coming in means less reliance on super savings, so it’s a great way to make your superannuation last. Consider whether returning to work will impact your retirement plans, or any age pension payments you may receive.
According to Tim, if you are at the age pension age, you can earn up to $300 per fortnight. “This is under what’s known as the work bonus,” he says. “Without this income counting toward the income test for your age pension.”
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This article was prepared by BT, a part of Westpac Banking Corporation ABN 33 007 457 141, AFSL and Australian Credit Licence 233714.This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. This article may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material. BT cannot give tax advice. Any tax considerations outlined in this article are general statements, based on an interpretation of the current tax law, and do not constitute tax advice. The tax implications of superannuation and account-based pensions can impact individual situations differently and you should seek specific tax advice from a registered tax agent or registered tax (financial) adviser. Information current as at 7 August 2019.