Zest! / RETIREMENT

Tidy up your retirement income

Does your retirement income spark joy? Super guru John Wasiliev is back with tips on how to tidy it up.

By John Wasiliev - 4 min read

A little about John

John Wasiliev writes on personal finance specialising in superannuation and self managed super funds, managed funds and trusts.

We all work hard throughout our lives to build up our superannuation so that when we look at our retirement savings, what we see sparks joy.

In my previous column, I outlined some of the ways to make the most of your super over those years you are saving. It’s when you reach the stage of life that I have – where I am now spending some of my super as tax free income—that all the work pays off.

But before we get to spending, we need to get our money organised.

All of us, when we retire from work, must make a number of important decisions to ensure our finances are neat and orderly. High on the list of these decisions is where the income we need to support ourselves in retirement will come from.

For many of us, superannuation will be the key source of this income.

How much we have saved will depend on various factors—our age, how long we have been saving, our savings rate, and what sort of investment returns our super has been earning. This is something we should all be familiar with, given that each year we receive an annual statement that tells us how much super we have accumulated, or we can go online or use the app to check our super balance anytime, anywhere.

Set up for orderly withdrawals

When we think about saving through super, we need to be mindful that superannuation is a savings plan with a specific purpose: to pay our money back to us when we retire. How it pays us back is the part we need to get in order.

Once you have reached retirement and established how much super you have, the decision on how you will spend your savings will depend on your income needs.

When you retire you can spend your super as either income withdrawals or you can take your super as lump sum amounts as you need them. An attractive aspect that applies to income and lump sum withdrawals from super after you have retired is that if you’re 60 years or older, they are generally tax free.

Of the two options, a super pension arrangement is the most appealing from an investment perspective. By drawing funds out gradually, more of your savings remain invested and have the potential to keep growing over time. In addition to the income payments being tax free for those aged 60 and over, earnings and capital gains made on investments in superannuation accounts that are paying a super pension are also tax exempt.

Sort out a super pension

Super pensions are commonly described as account-based pensions because they are paid from a superannuation account. The main feature of such pensions is that they have no fixed term. The pension finishes when the account balance is totally spent.

Account-based pensions have another distinctive feature: each year you must withdraw a minimum amount, which is a percentage of your pension account balance on July 1 of that year.

For example, if your super pension account balance is $1 million on July 1 and you are aged between 65 and 74 (inclusive), you will be required to withdraw 2.5 per cent of the balance, or $25,000, as a minimum in the 2021-22 tax year.

This minimum amount is 50 per cent lower than normal as government regulated a lower annual minimum over the past three years because of the Covid pandemic. Reductions in the minimum pension have been allowed whenever financial markets have faced major challenges. Before the Covid crisis, it was due to the 2008 Global Financial Crisis. In fact, the government has just extended the reduction in minimum drawdown requirements until 30 June 2023.

The table below shows the temporary and default minimum withdrawal percentages for each age group.

Minimum pension drawdown rates 

Age Temporary minimum drawdown rates – until 30 June 2023 Default minimum drawdown rates
 Under 65   2%  4%
 65-74   2.5%  5% 
 75-79   3%  6% 
 80-84   3.5%  7% 
 85-89   4.5%  9% 
 90-94   5.5%  11% 
 95 or more   7%  14%  

Source: Australian Taxation Office (Minimum annual payments for super income streams, Australian Taxation Office)

A further aspect of pensions is that there is a maximum amount that can be transferred into such pensions from total superannuation savings. Called the transfer balance cap, this maximum is now $1.7 million per person. Before July 1 last year, the maximum was $1.6 million.

Rules and flexibility

While there are rules about how much you can put into a superannuation pension account and the minimums you must withdraw, account-based pensions offer flexibility for anyone who wishes to take an active role in managing their retirement savings.

In this context, active management includes knowing that you can stop your account-based pension at any time and transfer your benefit into a super accumulation account from which you can make tax-free lump sum withdrawals. This strategy is described as a commutation.

You might consider commuting your pension if you no longer want to take regular income payments. If you do this according to super rules that allow you to deduct the lump sum from your transfer balance cap, you can later restore a tax-exempt pension with a transfer from an accumulation account.

You can even organise an account-based pension to continue to your spouse after you have passed away under an arrangement described as a reversionary pension.

There is a lot to know about superannuation pensions. When you are ready to tidy up your finances in preparation for retirement, it is worth researching and understanding how they could work for you.

 


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