14 Feb Retirement planning can be complex but there are options
My husband and I are approaching retirement. We have about $800,000 between us saved in super and are wondering what to do with it. We are thinking of taking it all out as a lump sum as we have been told we can get it tax free. Is that the best thing to do?
It’s great you have asked the question before taking it all out as a lump sum. While the tax information you have been given is usually correct for a person on or after age 60 accessing their super, there are many other things to consider. At the outset, I am going to assume that it is the right time for you to retire and that you have adequate savings for your future.
A person on or after age 60 can — in respect of most super funds — withdraw their money tax-free. However, there may be a tax liability in respect of certain kinds of super funds, so it’s best to confirm this with your particular fund. Assuming you are entitled to the tax-free withdrawals, this tax-free treatment applies to both lump-sum withdrawals and payments received as an income stream, often referred to as pension payments. So if your primary reason to withdraw as a lump sum is to access this treatment then there may be other options open to you.
Another matter to consider, if you decide to take all (or some) of your money out as a lump sum, you might not be able to put it back into a super fund if you change your mind. There are certain age and work requirements that will determine your ability to contribute. If, however, you choose to receive an income stream instead, you will still have the option to withdraw your super as a lump sum at a later date.
This is important because if you start an income stream in super, your savings used to support that income stream can also be eligible for a tax-free treatment for their earnings (investment dividends and interest). If you withdraw the money and invest personally, then you may be liable for personal income tax on those earnings.
Focusing on the tax implications, however, may distract you from more important considerations for retirement. Beyond the question of whether you have enough saved, there are three key areas of retirement planning to take into account. These include access to your funds if the need arises, access to an income stream to fund your retirement needs, and ensuring that your available funds can assist in addressing longevity considerations. The first two considerations are often seen as straightforward, and easily addressed. For example, starting an income stream from super can assist in addressing the need to provide you with an income stream, because that is what it is designed to do. You would usually also be able to access the underlying capital at any time.
However, a super income stream can result in investment risk. Depending on how your assets are invested, adverse market movements can have an impact on the amount available for withdrawal, the return generated, and by consequence, the ability to provide you with long-term income protection. Don’t consider this all as a negative though as it’s about understanding the potential risk — as you could have an appropriately diversified investment portfolio that can help provide some protection from market risk.
The question around longevity, however, is a more complicated issue and grows in importance as we continue to enjoy longer lives, and more years in retirement than our parents and earlier generations have enjoyed. While there are plenty of statistics of average life expectancy in retirement, it’s important to remember that these are just averages.
One way many people choose to address longevity is to consider whether the age pension is available to you. While this is a government-funded safety net, it may not provide you with enough to fund your retirement. Also, as the population ages, there is no guarantee that the age pension rules as they operate today will continue to apply at the time you seek to access it. Therefore it’s important to explore ways to provide your own insurance against longevity.
There are other solutions, such as annuities, that can play a role. By choosing to forgo access to some of your savings, you can access an income stream in return in retirement, with the flexibility to choose whether it is for a defined term or for the remainder of your life, or that of your spouse. There may be options available to have some funds repaid upon death, but you need to remember that you are forfeiting access to those funds for a period of time.
Getting the balance of different options right for you can be a complex process, but what’s important is realising there are options available. While taking what may appear to be the simplest solution, such as a tax-free lump-sum withdrawal sounds straightforward, it’s important to pause to see if it will help you achieve your goals.
And remember you don’t have to navigate these complex issues alone. A financial adviser can work with you to determine an appropriate course of action.