Five reasons to turn super into income
You’ve spent years building your super—now it’s time to turn those savings into income. Here are some strategies to help keep your money working for you after you make the retirement leap.
A little about Joel
Joel is the Director, Retirement Solutions at Russell Investments. A Fellow of the Institute of Actuaries, he helps members and clients navigate complex challenges and has worn many hats across the superannuation and consulting businesses. Joel currently leads a program of work aimed at making continuous improvements to Russell Investments’ offer for members approaching, at, or in retirement.
Retirement changes not only how you spend your time but also where your income comes from. After years of relying on a salary or wage from employment, retirement opens the option to use your carefully accumulated super balance to fund your day-to-day life.
For many people, that will mean starting a retirement income stream, such as an account-based pension or a lifetime income product (sometimes called an annuity). Rather than thinking of super only as a nest egg to preserve, an income stream like this turns your savings into regular payments while keeping the rest of your money invested.
What suits you will depend on your circumstances, but here are some top reasons it may be worth starting an income stream from your super.
1. Receive tax-free income payments
For most people aged 60 or over, payments from a retirement income stream are generally tax-free. That can make an income stream a simple and tax-effective way to replace at least part of the employment income you were used to receiving. Your circumstances matter so it is important to understand the rules before deciding.
2. Pay less tax (nothing) on investment earnings
If you retire permanently at age 60 or later, or you reach age 65, you can generally access your super. This allows you to move eligible super savings into the retirement phase to support a pension, noting that investment earnings on those savings are generally tax free. That can make a significant difference compared with leaving the same money in an accumulation account, where investment earnings may still be taxed. Moving into a pension product means more of your investment earnings can either remain invested or used to fund your retirement lifestyle.
3. Keep your retirement savings invested
Starting a retirement income stream does not mean your super stops working. Your balance can remain invested even as you draw from it, giving it the opportunity to continue earning returns throughout retirement. In fact, the 15/30/55 rule suggests that as much as 55% of your potential retirement income can come from investment returns earned after you retire. That compares with 30% from returns earned during your working life, and just 15% from your original super contributions.
4. Retain flexibility over how you access your money
Retirement spending can vary from month to month. It may suit you to have regular fortnightly or monthly payments for living costs, but you may also need extra money from time to time for larger expense items like holidays or home repairs. A retirement income stream can give you flexibility around how much you draw, how often you receive payments and any additional lump sums you may need.
5. Some products may help with Age Pension eligibility
Your choice of income stream can affect the amount of government Age Pension you receive. Once you reach Age Pension age, your super is generally assessed under both the income and assets ‘means’ tests. For example, lifetime income products that meet certain rules are treated favourably under the means test which may result in high Age Pension entitlements. The outcome depends on the type of income stream, when it was purchased and your circumstances, so check the Services Australia rules before making a decision.
Put your super to work (and spend it, too!)
Moving from earning an income to drawing on your retirement savings can be a big transition. A retirement income stream can provide regular income for your lifestyle today while keeping the rest of your savings invested for the years ahead. If you plan to keep working, a transition to retirement income stream may also help you reduce your hours and supplement your income.
Your next step is to work out how much income you’ll need and which approach suits you: leave your super where it is, start an income stream, take a lump sum or combine these options. It’s important to consider the potential impact on tax, investment returns, fees and government benefits before making a decision.
General advice can help you understand your options, but it does not take your personal circumstances, goals or retirement needs into account. Personalised financial advice can help you apply those options to your situation – whether you need targeted help setting up a pension or transition-to-retirement strategy, or comprehensive advice that considers your full financial picture, including investments outside super. We can help with both.
You’ve spent years building your super. Now it’s time to put it to work for the retirement you want. Review your options, estimate your income needs and consider speaking with a financial adviser before deciding how to use your super.
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