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You’ve done the hard yards and are now either fully retired or planning to retire soon. Now you can no longer depend on income from work, you may be considering various options to fund your living expenses.
During your working life, your super has grown in the background and you may have also accumulated other financial assets such as an investment property or a share portfolio.
Once you reach your preservation age and retire, you can either leave your super where it is, withdraw a lump sum or convert part or all of it into an income stream from a super pension account. There are no rules forcing you to transfer your super from accumulation to retirement phase when you retire or reach Age Pension age. You can choose to do either or both.
Given these choices, one of the most common questions asked by retirees or those about to retire is ‘Should I start a super pension or leave super in the accumulation phase?’
The answer will depend on your personal circumstances, but we will explore some of the pros and cons of each.
Leaving super in the accumulation phase
Greater than $1,700,000 super
Due to the Transfer Balance Cap rules, you can’t have more than $1.7 million in the retirement phase. Any balance above this amount must be withdrawn or stay in accumulation phase.
Investment income outside super
If you have built a good asset base outside super, you may be able to comfortably fund your expenses from investment income (such as rental income or dividends from shares) and not need regular pension income.
You may be over 65 and still working or planning to work part time after retirement and not require pension income to fund your expenses. If you plan to work, you will need an accumulation account to receive super contributions from your employer.
Retaining personal insurances in super
You may hold life insurance, total and permanent disability (TPD) insurance and income protection insurance within your super fund that will be lost once you convert all your accumulation benefits to retirement phase. If you wish to retain these covers, you will have to leave at least a small accumulation balance.
Centrelink Age Pension
While you are under the Age Pension age, super in accumulation accounts is exempt from the Centrelink income and assets tests. This can be useful for couples where the younger member is below Age Pension age. For example, if the older person is receiving the Age Pension they could cash out some of their super and recontribute it to their younger partner’s super account where it won’t be assessed until they reach Age Pension age.
No regular withdrawals
You can’t start a regular income stream from your accumulation account. However, it is possible to make lump sum withdrawals, if required, assuming you have met a condition of release.
15% tax rate
In the accumulation phase, all investment earnings are taxed at a flat 15% rate whereas in retirement phase all earnings and withdrawals (pension payments) are fully tax free.
Death benefits tax
If you pass away with your super in the accumulation phase and it is inherited by a non-dependent, any taxed component will be taxed to them at a 15% plus Medicare levy and any untaxed component at 30% plus Medicare levy.
By comparison, if you die with super in retirement phase and it is inherited by a non-dependant, any taxed component will be taxed at their marginal tax rate but they will receive a 15% tax offset. Any untaxed component will be taxed at their marginal tax rate with no tax offset.
Commencing a pension income stream
One of the most important benefits of commencing a pension income stream is that any earnings on investments in your super pension account are tax free.
This is the most common reason people start an income stream if they have met a condition of release.
Flexibility of income
You can start making regular withdrawals to fund your lifestyle expenses. They can be made fortnightly, monthly, quarterly or half-yearly.
You can also withdraw lump sum payments for any large expenses.
Once you start a super pension account, you must withdraw a minimum pension each year as mandated by the government. This is to ensure you use super for the sole purpose of providing retirement income, and not as a tax-free vehicle for intergenerational wealth transfer. So, even if your expenses are less than the minimum pension rate, you are still forced to withdraw that amount.
To meet your regular income withdrawals, you may be forced to sell your investments. If you are withdrawing more than your super is earning, the capital will deplete over the long term and your super may run out earlier than you would like.
Centrelink Age Pension
A pension account is deemed for Centrelink purposes and it may reduce or cut off your Age Pension entitlements.
There are a lot of things to consider when starting a pension or leaving super in accumulation, such as your income needs, investment earnings, fees, government rules and your personal circumstances. We strongly recommend you consider independent financial advice in such situations to ensure you make the most of your retirement savings.