You may have read in the news that many of us are retiring with a mortgage debt. Many people want — or need — to buy a home later in life — and it can be a daunting prospect to be in debt while retired.
Program: Can i retire with a mortgage debt?
Superannuation is arguably the most tax-effective way to save for retirement here in Australia.
But when it’s finally time to tap into your hard-earned money, there’s a big decision to make: do you take a lump sum or start drawing a pension from your super?
If you’re like most retirees, you’ll probably want regular income to fund your lifestyle, and that’s where superannuation pension payments come in.
What are superannuation pension payments?
A superannuation pension is actually very straightforward: it’s a regular income stream that comes from your super fund when you retire. Rather than withdrawing your entire super balance as a lump sum, you convert your super into an account-based pension, which means you’ll get paid a regular income while the rest of your balance stays invested and keeps working for you.
Bear in mind that the government has set minimum withdrawal rates that get higher as you age. If you’re under 65, for example, you’ll need to withdraw at least 4 per cent of your account balance each year. Between 65 and 74, that rate goes up to 5 per cent, and it increases as you get older until it’s 14 per cent at age 95 and above. The great thing is that — for most people — once you hit 60, all income streams from your super become tax-free.
Why take a pension instead of a lump sum?
When you hit retirement age, it can be tempting to take out a lump sum. Maybe you’ve got something big in mind, like paying off your mortgage or buying that boat you’ve been eyeing off. But there are some strong reasons why a pension might be a smarter choice for the long haul, particularly the following three.
Keep your money working for you: When you convert your super into a pension, the rest of your balance stays invested. This means your money keeps growing (hopefully) and you’ll have a much better chance of making your savings last throughout retirement.
Avoid the risk of running out: One of the biggest worries for retirees is outliving their savings. If you take out a big lump sum, there’s always the chance that you’ll blow through your super too quickly and end up short on cash in your later years — when you might need it most.
A pension spreads out your withdrawals over time, so you can better manage your spending habits.
Regular, tax-free income: With a pension, you’ll set up regular income payments — monthly, quarterly or annually — that you can rely on. This makes it easier to budget and plan for your living expenses. And the best part? If you’re over 60, these payments are completely tax-free for most Australians.
What to consider before taking a super pension
Here are a few things to think about before you dive straight into a pension from your super.
How much do I need? The beauty of super pensions is that they’re flexible — you can choose how much you want to withdraw each year (as long as it meets the minimum withdrawal rate). But the key is to not take out too much too soon. Sit down, work out your living expenses and make sure your pension payments will cover them.
Making your super last: Australians are living longer than ever before, which means your super needs to go the distance. With life expectancy well into the 80s nowadays, you could be drawing down on your super for 20 years or more. A pension helps you manage this by spreading withdrawals over time. But it’s still important to check in on how your super is performing, especially if the markets take a dip.
Investment strategy: Even when you’re retired, your super is still invested. That means you’ll need to keep an eye on your investment strategy. Are you comfortable taking on some risk for potentially higher returns, or do you want to play it safer now that you’re drawing down on your super? Most retirees opt for a balanced or conservative portfolio to protect their savings while still aiming for some growth.
How the transfer balance cap affects your super pension
An important rule to keep in mind is the transfer balance cap, which limits how much you can transfer into the tax-free retirement phase of super. The cap is currently $1.9 million, but it can — and no doubt will — change in the coming years. Keep in mind that it was $1.6m just a few short years ago.
If your super balance is higher than this, anything over the cap has to stay in an accumulation account, where earnings are taxed at 15 per cent. This probably won’t be an issue for most retirees but it’s worth knowing if you’ve built up a sizeable super balance.
Lump sum v pension: what’s right for you?
At the end of the day, only you know your personal situation and only you can make the best decision for your future. If you’ve got other assets or investments that can provide you with a regular income, then a lump sum could make more sense.
But if you’re like most retirees, you’ll want a steady income to cover your living costs and make sure your money lasts for years to come.
For most people, a pension is a way to get flexibility, some handy tax benefits and overall peace of mind that you won’t run out of money any time soon. Plus, with regular income payments, it’s easier to manage your day-to-day finances.