Planning for your retirement is no simple matter – there will be many questions that come into play. Not only in the process of investing for your retirement, but also in choosing how to cash out on your nest egg when the time comes.
One of the most significant decisions for retirees is whether to draw their superannuation as a lump sum, or whether to receive it as an income stream (pension) for life.
LUMP SUM
Depending on the rules and regulations of your superannuation fund, you may be able to withdraw some, or all, of your super as a lump sum once you reach ‘preservation age’ of 55 – 60 (depending on the year you were born). Whilst choosing a lump sum payment is the least popular option (approximately 16% of Australians withdraw their super as a lump sum), it does have its benefits.
PROS
Flexibility
For many retirees, the flexibility that comes with a lump sum super payment is the winning factor. With a lump sum, you can choose to invest the entire amount into anything you choose (property, passive income business). Or even use some of it to make bucket-list purchases (house, property renovations, caravan, car, travel experiences). You can also withdraw your lump sum in several smaller amounts to reduce the tax you pay and/or maximise your age pension (depending on your age).
Potential Income Streams
Even when opting for a lump sum payment, you can still use some or all of this money to create a potential income stream. This is a popular option for those who have a relatively low super balance (between $10,000 and $100,000). And are looking to turn that money into a greater sum.
CONS
Tax Implications
Although superannuation funds are free of taxation once you pass preservation age, different rates will apply to untaxed funds such as government super funds. Any lump sum withdrawal made before preservation age will be taxed accordingly. Tax will also be applicable to any potential income stream, capital gains or interest earned once you have withdrawn your super from your fund.
Future Sustainability
Once you have your super lump sum in your hands, it can be very tempting to spend some, most or even all of it, rather than reinvesting or saving it. The risk of running out of the money required to sustain yourself to the end of your life is much greater than if you were to receive your super as an income stream or pension. If you do opt for a lump sum payment, it’s wise to invest it in something like an investment property. Or at least seek the advice of a financial professional to ensure your money works for you.
INCOME STREAM (PENSION)
If you choose to keep working past your preservation age, you may opt to receive a retirement income stream. This means that your superannuation fund will make regular payments from your super account to top up your salary while you continue working. These payments can be received annually, quarterly or monthly. They can be used for increased lifestyle enhancement or be reinvested into other avenues to help maximise your income post-retirement.
PROS
Enhance Your Lifestyle
The increased income you receive can enable you to substantially change your lifestyle. This could mean more travel, reducing your work hours to part-time, and paying off your existing debts sooner. Or even buying that sports car you’ve always dreamed of.
Tax Benefits
As long as your money is still in a super fund, you are eligible for a range of tax benefits, which would no longer apply to a lump sum withdrawal.
Safety Net
If you choose to receive a regular income stream from your super, you still have the option to withdraw a lump sum, should the need arise. This gives you some peace of mind that in the case of a life-altering event, you will have a safety net to fall back on.
CONS
Eligibility for Age Pension
To receive a full or part age pension, you must first meet the requirements of an income and assets test. The more income you receive, the less pension you are entitled to. So receiving an income stream from your super may affect this.
Withdrawal Minimums
Whilst there is generally no limit on how much you can withdraw from an income stream, there is a minimum amount that you must withdraw within a financial year. This is calculated as a percentage of your account balance, and increases with your age.
Transfer Balance Caps
As of July 01, 2017, there is a government-regulated cap on the amount that can be transferred to a tax-free account-based pension. This is known as a ‘transfer balance cap’, and is set at $1.6M.
Whether you choose to take your superannuation as a lump sum, income stream or a combination of both, it’s essential to plan for all scenarios well ahead of retirement age.
Market fluctuations, account fees and several unforeseen circumstances can all affect your nest egg. Consulting a professional to help you process those scenarios, can help break down your retirement options and ensure your best retirement future.
Our experienced team of financial professionals can help you take the necessary steps to protect and maximise your superannuation’s potential. Contact us now for an obligation-free consult.
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