Are you an Australian planning for retirement and confused about your options?
There is often a dilemma about whether to receive your super as an income stream or a lump sum
Of course, you shouldn’t take this decision lightly.
Remember, the choice of how to receive your superannuation funds will determine your comfort during retirement.
Statistics reveal that a 65 year old couple about to retire as of 2017 needs an annual income of $60,063 to enjoy a comfortable retirement.
Of course, this figure depends on whether both people are relatively healthy and own their property.
You can actually decide on how to receive your super.
Here are the pros and cons of a lump sum and income stream to help you make a good decision.
1. Lump Sum
- MORE FLEXIBILITY: With the lump sum option, you have the freedom to choose your investment options. According to the roof restoration specialists at Mr Highlights, a lump sum allows for choices. “With a lump sum, you can choose to invest the entire amount, make large purchases such as home improvements or pay off outstanding debts such as a mortgage. It all depends on preference which is what this option allows.”
- POTENTIAL INCOME STREAMS: Depending on the investment option you choose, you can enjoy a regular income stream. For instance, if you invest in property, you can enjoy a regular income stream.
- TAX IMPLICATIONS: Superannuation funds are tax free once you turn 60 whether you receive it as a lump sum or an income stream. However, there are different rates applicable to untaxed funds such as government super funds. However, if you make a lump sum withdrawal before you turn 60, you have to pay the relevant taxes. Also, if you withdraw the amount before the preservation age, the taxes are applicable at 22% (and this includes Medicare Levy) or at the applicable marginal rate, depending on the lowest option.
- NO SUPER CONSIDERATIONS: If you take your superannuation funds as a lump sum, they will not be considered super. Therefore, depending on your investments, you should expect some tax implications from the income stream, capital gains or interest.
- FUTURE PLANNING: If you receive a lump sum amount, you might be tempted to spend the amount rather than investing or saving it. Therefore, there is a huge risk of running out of the super lump sum earlier compared to if it was an income stream. For the expert concreters at KJ Concreting, investing is a good option. “If you receive a lump sum, it can’t be put back into your super to receive an income stream. Meaning that investing it into something like property will allow you to have another income stream instead of just relying on your super. Choosing this option means sticking to it.
2. Income Stream
- IMPROVING YOUR LIFESTYLE: Here, you can top up on your regular income each month and improve your lifestyle considerably. Therefore, you are allowed to reduce your working hours, preferably to a part-time option, you can reduce your debts, take more holidays and find more ways to spend your money without running out.
- TAX-FREE EARNINGS FROM INVESTMENTS: If your money is in a super fund, you can enjoy some tax concessions compared to when your money is withdrawn. Some of the tax concessions available with a super are unmatched to any other tax benefits offered by different types of savings.
- BETTER BUDGETING: With the income stream option, you can choose the total amount you want to receive in pension every year, and the frequency. Such as quarterly, monthly, half-yearly or annually. However, the total amount you receive, depends on the minimum percentage of the total amount in your account balance as well as the maximum percentage to allow transition into retirement pensions. For the remedial massage therapists at Kneadwork Massage, better budgeting will benefit health concerns that may crop up. “Things like joint and muscle pain are common among the retired demographic. Budgeting might be easier if you aren’t receiving your super as a lump sum where you might be tempted to invest it all in your home or go on holiday rather than take care of your health expenses.”
- LUMP SUMS: Although, you can enjoy receiving a regular income at an ascertained frequency, there is also the option of getting a lump sum amount if needed. But it depends on the account balance.
- WITHDRAWAL RULES: With an income stream withdrawal option, there is no limit on how much to withdraw. However, there is a limit on how much you can withdraw per year. The amount will be calculated as a total percentage of your account balance and will increase as you get older.
- ELIGIBILITY OF AGE PENSION: Your eligibility to receive a part or full Age Pension depends on your income and assets. Therefore, getting an account-based income stream affects your eligibility. Therefore, if you have more income and assets, you will receive a lesser amount for your Age Pension.
- LIFETIME CAP ON BALANCES: In July, 2017, a cap was introduced on the total amount transferable to a tax-free account based pension. It’s referred to as the transfer balance cap and it amounts to $1.6 million. It is a lifetime cap and is indexed according to the inflation then rounded down to the nearest $100,000.
- IT WON’T LAST FOREVER: Your income stream will continue if there is money in your account. Of course, there is no guarantee on how long that money will last. It depends on how much you withdraw every year, your investment options, the fees paid and the market fluctuations. Your super account is exposed to investment markets so there will be negative and positive fluctuations on your total balance. You need to make plans on how to survive when the super runs out. Of course, you can use ASIC’s calculator to know how long the money will actually last and start planning for the future to avoid any hassles.
In conclusion, there is no wrong answer when deciding whether to choose an income stream or lump sum amount when it comes to your superannuation funds.
Before you make your choice, you need to seek the necessary financial advisor from experts in the field.
That way, you can assess all the pros and cons and determine the right option for your needs.
Do your research and consult with other people to identify and ideal option depending on your unique financial needs upon retirement.
Got more questions about which option is best for you? Speak to a WealthPath team member today.