14 Feb Super research: Retirement could lead to financial freedom
FOR most people who have accumulated superannuation during their working years, a regular income is all part of the lifestyle they lead.
When it comes to retirement, there is no reason for that regular payment pattern to change, even if the value of each pay might drop back a little.
In fact, it can work in your favour to plan to pay yourself a regular pension in retirement, not only for ease of transition to retirement, but also to help your retirement funds last longer.
Sunsuper Manager of Advice Operations Evan Poole said the company’s research had found the majority of income generated by superannuation could actually be earned after people retired.
Labelled the 10/30/60 Revelation, Mr Poole said it found that only about 10% of the money people drew from their super in retirement came from contributions they had made during their working life.
He said around 30% of the drawings would come from the interest earned on the money deposited during a person’s working life, while the remaining 60% could come from interest earned on the retirement funds, after a person retires.
The theory only works if the balance of the superannuation earned over the working years remains invested after a person retires and works simply because of the effect of compound interest.
“Account-based pensions are designed to provide an income level that is consistent across the years of retirement,” Mr Poole said.
The Australian Securities and Investment Commission’s Moneysmart website describes an account-based pension as a “regular income stream, purchased with money you have accumulated in super, after you have reached preservation age”.
There are a number for rules around the minimum payment each year from the account based on the age of account holder. There’s also a cap on the amount of money that can be transferred to a tax-free account-based pension which has been set at $1.6 million.
Moneysmart lists a range of benefits of an account-based pension including that you decide on the regular payment from the account (within minimum and maximum allowed); you don’t pay tax on pension payments from age 60; you don’t pay tax on investment earnings; you can access a lump sum at any time; your balance will increase as investment earnings are added to your account; you can choose how your money is invested by the fund manager; and there may be money left over for your estate.
On the flipside, Moneysmart reminds people that investments earnings are never guaranteed and may fluctuate with market performance, and that there’s no guarantee your super will last as long as you do.
Mr Poole said one of the benefits of opening an account-based pension within a super fund was that the retiree could simply get on with life knowing that they had experts working on maintaining and growing the balance of their super funds with access to a wide range of investment products.
“When you’re trying to do it yourself, you’re trying to compete with a team that looks at things intra-day. Even just rolling term deposits every three or six months is a task. Let alone determining what the best shares are,” Mr Poole said.
As with any financial matter, it’s important to seek advice from an expert, whether it’s from your own super fund, or an independent financial advisor.
Mr Poole said another benefit of staying with a super fund was access to experts.
“Whilst you’re with a fund you still maintain the ability to get advice and help.”