Using my super: income streams, lump sums or both

You have a number of options when it comes to how you use your super to fund retirement.

1. Income streams
   • Allocated pensions and annuities Life expectancy pensions and annuities
   • Lifetime pensions and annuities
   • Fixed term pensions and annuities
2. Lump sums
3. Lump sum and income stream

Income streams

Income streams are available as pensions and annuities.

A pension is a regular income stream offered by a super fund. An annuity is a contract, purchased mainly from life companies, that pays out an agreed sum over a period of years.

Putting your super into an income stream is the simplest and most tax effective way to achieve a regular income in retirement. Benefits include:

• the ability to draw a regular income
• tax advantages
• access to Centrelink Means Tests concessions
• Pay as you go (PAYG) tax deductions by the income stream provider.

Give careful consideration to the type of income stream and its specific characteristics, as it will affect your Centrelink entitlements, tax and estate plan. Talk to a financial planner to ensure you maximise your benefits in retirement.

Let’s look at the choices available.

Allocated pensions and annuities

• Similar to a managed fund investment.
• You make the investment choice.
• The investment risk rests with you.
• Only superannuation monies can be used to purchase an allocated income stream.
• Most flexible type of income stream, as it can be adjusted annually to provide different income payments to meet your needs and you can generally make lump sum withdrawals if required.
• No guarantee that you will have an income for your lifetime or any fixed period. Longevity of the pension or annuity is dependent on how much you draw out annually and what investment earnings you receive.

Life expectancy pensions and annuities

• Guaranteed to be payable for a fixed period of time (number of years broadly equivalent to your life expectancy at the time of purchase).
• If you die within the fixed period, the payments can continue, usually to a beneficiary or your estate, or may be converted to a lump sum.

Lifetime pensions and annuities

• The most secure and certain range of the income streams, but also the least flexible.
• The provider bears the investment risk and your income is guaranteed to be payable for your lifetime.
• For a lifetime annuity, a lump sum of money is exchanged for guaranteed income payments.
• For a lifetime pension, the income stream becomes payable from your super fund, usually set as a percentage of the income you received from your employment prior to retirement. These are also commonly referred to as defined benefit pensions.

Fixed term pensions and annuities

• These provide security and certainty.
• You exchange a sum of money for a guaranteed series of income payments for a fixed period of time between one and 25 years.
• You can nominate a percentage of your initial investment capital to be returned to you at the end of the term, known as the residual capital value.
• If you die during the period, payments can continue for the entire term, usually to a beneficiary or your estate. Alternatively the income can be cashed in and a lump sum would be payable.

Lump sums

You may choose to take your super as a lump sum. If you are considering this, you need to think about:

• The tax and social security implications that apply upon withdrawal.
• How you will ensure the lump sum lasts the length of your retirement.

It’s a good idea to talk to a financial planner about your retirement goals and financial situation before you go down this path.

Lump sum and income stream

This combined strategy is generally used when you want to have the comfort of a regular income but also wish to access a larger sum of money, perhaps to fund a holiday or other large expense.

Although this approach involves an income stream, you may lose access to some Centrelink entitlements because you are taking a lump sum.