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Superannuation experts say there are benefits to each of these approaches – and you’re also free to use a mixture of them. Founder of Yulania Financial and financial advisor Katherine Spitzkowsky says taking a lump sum might be appropriate if you have a health issue or need to distribute large amounts of savings.
“If there is a health problem, we might want to get the money out so we can distribute it to family members, to pay down debt or that sort of thing,” she says.
Katherine Spitzkowsky said there was a downside to annuity products.
By contrast, account-based pensions and annuities deliver regular smaller payments designed to replace the income you would have received as an employee.
“Most people opt for an account-based pension where your super is converted to an income stream. The earnings and pension payments are tax free, and you can effectively have a regular income to support your lifestyle and make budgeting easy,” financial advisor Michelle McKindlay says.
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“The consideration with this is that the balance usually depletes over time and is not guaranteed for life.”
An alternative to an account-based pension is to use your super savings to buy an annuity product, which can give a pre-set regular income for many years.
“The downside of that is the fees are generally quite high,” Spitzkowsky says.
It’s also important to understand the difference between “accumulation” and “retirement” accounts and their tax implications. Throughout your working life, you contribute super to an accumulation account, where earnings are taxed at 15 per cent.
When you start a retirement pension account, it’s tax-free. Often, “the sooner you can get it over to pension phase, the better”, Spitzkowsky says.
From the age of 67, you may also be eligible for the government age pension, but this depends on income and assets tests. You can find information about the limits and how these are applied on the Services Australia website, but it might also be worth checking in with an advisor to work out how your super and other assets will interact with pension payments.
Keep an eye on fees and investment options
Superannuation savers of every age are encouraged to check in on how their savings are invested and make sure this aligns with their values and risk appetite. That advice doesn’t change even once you’re spending your funds.
Spitzkowsky says retirees should be checking in on fees in their fund and what this looks like in the retirement phase. “Some funds that are really cost-efficient as an accumulation fund can become expensive as a pension fund, so it’s important to make sure that the super fund that you’re with remains appropriate for your situation,” she says.
“The other big one is the level of investment risk. Most people will not have ever chosen what their underlying investment is, and if they did, they probably did it quite some time ago.”
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This is the time to ask your fund how your savings will be invested during retirement. Then you can decide whether the settings match your risk profile and if they’ll deliver what you need for the long term.
Double-check insurances
There’s a decent chance that throughout your working life, you’ve held a policy like life insurance within your super fund. Before you make big decisions about drawing down your funds, it’s worth checking whether these insurances will still stand.
Some of the policies held within super end at a certain age, like 65, or the policy could expire when you roll your account from accumulation to pension mode. Spitzkowsky says retirees should be mindful of this.
“If you’re working well into your 60s, you probably need to have a think about whether you’d need additional cover,” she says.
“Particularly for life insurance, where there are still high levels of debt, consider taking out like an alternative policy that you have more control over.”
This is the final part of our six-week Gen Super series, which takes an in-depth look at what to do with your superannuation at each age, from Gen Alphas in their first jobs to Baby Boomers starting to retire – and beyond.
- Advice given in this article is general in nature and not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making financial decisions.
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This story was created in partnership with Colonial First State. The content is independent of any influence by the commercial partner.