When you retire, the need for a regular income does not stop. A retirement income stream is an investment vehicle which allows you to receive regular income payments after you have ceased working, to help fund your living expenses.
There are a number of different types of retirement income streams which can be purchased using either your superannuation or personal savings (non-superannuation money). The most common type of income stream is an account based pension.
What you need to do is match the most appropriate income stream(s) to your own specific circumstances and this is where your financial adviser can assist.
Account Based Pension
Account based pensions (previously known as allocated pensions) are the most flexible type of income stream.
They can only be purchased using superannuation money, however if you have money outside of superannuation you may be able to contribute it into superannuation and then commence an account based pension. For more information, please refer to the ‘Superannuation Contributions’ fact sheet under the Superannuation Financial Education Series.
You will receive an income from your pension each year until the account balance is nil. The income you will receive from your account based pension will vary from year to year depending upon the account balance as at 1 July. As such if you draw a large income from the pension it will run out more quickly than if you were to draw the minimum annual payment.
The income from an account based pension is tax-free if you are aged 60 or more.
If you are under 60 some of the income may be tax-free and the remainder will be taxable; however you should receive a 15% tax rebate on this portion.
Account based pensions enable maximum flexibility as you have access to your capital. This means you can withdraw a lump sum in addition to the income stream. You can think of an account based pension as your personal retirement income account.
Please refer to the ‘Account Based Pension’ fact sheet under the Retirement Income Financial Education Series for more information, including examples showing how the income will be treated for tax purposes.
Non-commutable Account Based Pension (Transition to Retirement)
In July 2005 the Australian Government introduced legislation that enabled the commencement of an income stream from superannuation savings while you are still working. This type of income stream is known as a transition to retirement pension.
A transition to retirement pension is a non-commutable income stream you can commence while you are still working if you are over your preservation age (starting at age 55 and increasing depending on your date of birth). Non-commutable simply means that you are not able to make a lump sum withdrawal from your pension. When you reach age 65 or stop working, the non-commutable income stream automatically converts to a normal account based pension and you are then able to make lump sum withdrawals.
You will receive an income from your pension each year until the account balance is nil, however your pension income will vary from year to year depending upon the account balance as at 1 July. As such if you draw a large income from the pension it will run out more quickly than if you were to draw the minimum annual payment. There is also a maximum annual limit on the amount of income you can receive from the pension, which is 10% of the account balance as at 1 July each year.
The income from a transition to retirement pension is tax-free if you are aged 60 or more. If you are under 60 some of the income may be tax-free and the remainder will be taxable, but you will receive a 15% tax rebate on the taxable portion.
Transition to retirement pensions can benefit people who want to reduce their working hours as it enables their reduced salary income to be supplemented by income drawn from superannuation benefits. In addition, it can be combined with a salary sacrifice strategy to build your retirement savings in a tax-effective manner.
Please refer to the ‘Transition to Retirement Pension’ fact sheet under the Retirement Income Financial Education Series for more information.
Fixed Term Annuity
Annuities are income streams which are usually paid by a life insurance company. This means that you can use your personal savings (non-superannuation money) to purchase an annuity as well as your superannuation savings. Annuities provide a guaranteed regular income in exchange for an initial lump sum amount, paid to you monthly, quarterly, half-yearly, or yearly, whichever suits your needs best, for the term of the annuity.
As the name suggests a fixed term annuity will pay you an income for a set period of time, usually between 1 and 30 years. Before you commence the annuity you will select the period over which you wish the annuity to be paid. The annuity is only paid for the fixed term, if you live longer than the fixed term the annuity will stop. When you purchase the annuity, you can elect to receive all or part of your original investment amount back at the end of the term (this is called the residual capital value), however this will reduce the amount you receive each year as income.
Your initial investment and income is 100% guaranteed and will not be affected by interest rate changes or movements in share markets, which will provide you with peace of mind.
The income from an annuity purchased with superannuation money is tax-free if you are aged 60 or more. If you are under 60 some of the income may be tax-free and the remainder will be taxable, but you will receive a 15% tax rebate on the taxable portion.
If you purchase the annuity with personal savings (or non-superannuation money) the income will be taxable at your marginal tax rate, however you may receive a “tax-free amount”.
Please refer to the ‘Guaranteed Annuities’ fact sheet under the Retirement Income Financial Education Series for more information.
Term Allocated Pensions
Term allocated pensions (or TAP’s) purchased from 20 September 2004 to 19 September 2007 are treated favourably for Centrelink and Department of Veteran Affairs purposes under the Assets test as only half of the account balance is assessed as an asset.
Term allocated pensions pay a regular income stream for a fixed term, determined at the time of purchase. The income payments vary each year depending upon the account balance as at 1 July and the remaining term of the pension. While the income payments do change each year you do not have the same level of flexibility as with an account based pension, however the term allocated pension is designed to pay you some level of income for the term of the pension.
You are not able to make a lump sum withdrawal from a term allocated pension except in very limited circumstances. If you are currently invested in a term allocated pension you are not able to convert it into an account based pension.
Source: Aon Hewitt Financial Advice Limited, August 2015