Pension and Income Stream Strategies
Protecting your retirement savings in times of uncertainty
When you’re building up your super, you’re in the accumulation phase. Once you’re able to access your super, you can start considering whether to make a withdrawal and/or start a retirement income stream. Of course, you can always have a combination of both.
With COVID-19 creating significant volatility in global investment markets – affecting many people’s super and retirement funds – it’s never been more important to have an informed strategy for defending and managing your retirement income as you move into drawdown.
You’ll understandably have a lot of questions – Should I delay my retirement? Should I change how I invest?
They’re important questions to work through – that’s what this chapter is all about.
Retirement income 101: some important basics
These days, retirement isn’t necessarily a hard stop at 65. You don’t have to retire fully at your preservation age, which is the age you’re eligible to draw on your super. Many people now reduce their working hours and transition slowly into retirement by supplementing their reduced income using their superannuation through a ‘transition to retirement (TTR)’ income stream.
As soon as you hit your preservation age you can use a TTR. But be aware that the tax on investment earnings paid by your super fund will still be 15% until you move to a full condition of release. (1)
Go deeper - Find out more about transition to retirement income streams here.
Once you retire after reaching your preservation age, you have unlimited access to your super. This means you now have the choice of taking a lump sum or income stream – or both. In some cases, it’s better to keep your money invested in the superannuation environment and generate a retirement income stream that you then draw down on to fund your lifestyle.
If you start taking an income stream, you’re now in retirement phase – and your earnings are taxed at 0%. There are some important things to know about tax and limits.
(1) A TTR will move to retirement phase when you reach age 65 or notify the trustee you meet a condition of release that enables you to access all of your superannuation, such as retirement after your preservation age.
Some types of super income streams are:
• Account-based pensions.
• Annuities.
• Defined benefit pensions (only available to some defined benefit members). (2)
Some important things to know about your income stream – if you’re in a taxed super fund:
• There’s a limit of $1.6 million (3) you can transfer into a retirement phase income stream from your super – this is called the Transfer Balance Cap. You can read more about this here.
• The earnings on the capital supporting your income stream are tax-free. (4)
• Once you’re 60 or older, any income payments or lump sum from this source are also tax-free.
• Between your preservation age to age 60, you’re entitled to a tax offset of 15% on the taxable portion, which provides a tax-effective retirement income. You do not pay tax on the tax-free portion. Lump-sum withdrawals may be subject to tax.
(2) If you have one of these pensions you should consult your super fund about the specific rules relating to that pension.
(3) This applies for the 2019/20 and 2020/21 financial years. It may be indexed in the future.
(4) This excludes transition to retirement income streams until you reach age 65 or meet a condition of release that enables you to access all of your superannuation.
Other things to think about with account-based pensions:
• You can choose how your money is invested – however, investment earnings will vary based on economic and market conditions.
• There’s a minimum amount you must withdraw each year. Read here for more information.
Other things to think about with annuties:
• You’re protected from negative market movements; however, you generally won’t benefit from any positive market performance.
• Payments are paid at an agreed rate for a set period determined at when you start.
• You can’t change the amount and frequency of the income payments once they start.
Understand your big risks
Right now, one of the most important things all retirees can do is understand some of the unique risks to retirement funds posed by COVID-19 – and respond in the right way.
During the Global Financial Crisis, 80% of Australian retirees said their income fell when they retired. (5) Poor returns due to volatility that depletes your capital just before or in the early years of retirement is one of the biggest risks to your retirement savings. It’s called sequencing risk, and it’s important to manage it. That’s where professional advice can really help.
Another key risk is locking in losses by suddenly switching some of your investments into cash – or physically taking cash out to hold in a bank account.
Talk to a professional about these kinds of decisions to make sure you don’t make a panicked move that could put you at a real disadvantage later when markets turn.
Understand your options
The Federal Government has introduced some temporary measures to help if you’ve been affected by COVID-19, including reducing the minimum drawdown requirements by 50%.
For some super income streams, this means the minimum amount you’re required to drawdown is less than usual, for the 2019/20 and 2020/21 financial years. This may help with the impact of volatility on your retirement savings by allowing more to remain in your income stream.
Making the most of your retirement income
Even after you retire, you can use some smart strategies to continue building your wealth.
That means there will be less pressure on your retirement savings to keep up with the rising costs of living, and you’ll help safeguard your money from external factors such as market volatility.
(5) HSBC, Future of Retirement: Life after work?, 2013.
Top tips to consider to help maximise your retirement income
We asked some financial advisers for their insights.
• Retirement isn’t all or nothing – it’s not necessarily a hard stop at 65. You can gradually transition into part-time work.
• You’re probably going to live longer than you expect, so you’ll need an income for longer than you think.
• Have a fixed budget each year to make sure your money lasts.
• If markets turn or things happen, don’t panic – talk to a professional financial adviser who can help you assess your options.
Note: There are all sorts of risks and factors to consider when it comes to defending and managing your retirement income. Consult a professional if you need to.
GENERAL ADVICE WARNING
The advice contained within this document does not consider any person’s particular objectives, needs or financial situation. Before making a decision regarding the acquisition or disposal of a Financial Product, persons should assess whether the advice is appropriate to their objectives, needs or financial situation. Persons may wish to make their assessment themselves or seek the help of an adviser. No responsibility is taken for persons acting on the information within this document. Persons doing so, do so at their own risk. Before acquiring a financial product, a person should obtain a Product Disclosure Statement (PDS) relating to that product and consider the contents of the PDS before making a decision about whether to acquire the product.