How and when should you commence an income stream from your super as you move towards retirement?
Starting an Account-Based Pension (ABP) is a major step in anyone’s retirement journey. Getting the timing right is very important. So too is judging the appropriate amount of money you will withdraw. Knowing that this process is not set in stone comes as a great relief to many retirees. Hence today’s explainer on the four key questions to consider when starting an ABP. And the four key things that you will need to know if you wish to reverse this action at any time.
Estimate your needs
Start by defining how much income you’ll need in retirement. Next split this into non-negotiables (fixed expenses) and negotiables (discretionary). This will help to identify what your retirement salary needs to be, and which sources are available to fund – in short, where it will come from.
Will you get an Age Pension?
Next step is to determine your eligibility for Age Pension benefits. We can help estimate Age Pension benefits based on commencing an income stream with your super or retaining it in what’s called accumulation phase (where you aren’t drawing regularly from it). Depending on your age and your partner’s, if you have one, the assessment by Centrelink can vary.
How much top-up will you require?
Knowing how much your Age Pension benefits are likely to be will provide the baseline for your retirement salary. Next consider how much more income you will need (from other sources) to reach your total retirement salary needs. This could be made up of a few things depending on your circumstances: interest on your savings, some casual work, rent from investment properties or regular withdrawals from your superannuation.
How long will this money last?
It’s now time to examine how long your super might last or how these income sources may change during your retirement. This is to give you confidence that you can live the retirement you have been working so hard to finally enjoy!
The actual process of establishing your Account-Based Pension is undertaken with your super fund, although you do not have to automatically sign up for their suggested ABP or retirement income stream. You can research the various offerings and choose to move your super to whichever Account-Based pension suits your needs best. There are many comparison sites to help you research this need. You will need to nominate the size and frequency of your payments and how you would like this money to be invested. You will also need to observe the minimum drawdowns rates set by the Federal Government.
What can go wrong?
This comes back to the timing of the move to an Account-Based Pension. Again, there is no right or wrong answer here, but sometimes both members of a couple will start an ABP – and then learn that they could be penalised if the younger member didn’t really need to do this.
Here’s how this aspect of the super rules works.
Sonya and Steve
Megan recently met with Sonya who is 66 and Steve who is 60. They have both retired and had already commenced income streams from their super accounts, because they heard this was an easy way to fund their retirement. But they were concerned about how long their super might last. Due to their age differences, it was determined that if Steve had left his super in the accumulation phase, Sonya would be eligible for $720 per fortnight in Age Pension payments plus, of course, a Pension Concession Card. This compared with no eligibility if Steve kept his income stream open. Megan was able to show Sonya and Steve how they could increase their Age Pension benefits by nearly $19,000 per annum. This simple adjustment to their situation also meant their savings would last at least 6 years longer than they originally thought.
How do you reverse an Account-Based Pension?
The conclusion was that Steve should move back from the decumulation or pension phase of super to an accumulation account to change the joint asset amount being evaluated by Centrelink.
There are two main ways of doing this, but it will depend upon the value of the Account-Based Pension and how this affects Age Pension calculations.
Steve can close his ABP and place the funds in a new accumulation account
Steve could leave his decumulation account open, withdraw most of the funds in a lump sum and use this to start a new accumulation account. This strategy is fine, but one that could be more useful for a couple who are closer to the maximum Age Pension entitlement.
Remember, moving money back to accumulation requires that the account holder needs to open a new superannuation account with a provider. You can’t just roll back automatically, so this means a new application form etc. It’s important to check with your superfund if you are contemplating this so that you receive all the information that you will need.
(However if you still have an existing accumulation account for some reason, then you can close the ABP and just roll your money over to that existing account. It’s best to speak with the relevant super fund on what is needed to complete this transaction.
Warning – don’t do this!
It’s important not to withdraw the money into your bank account, to then transfer into super. This would result in the need to meet a contributions limit condition, because the money has now been moved outside the superannuation environment.
If you would like to check your situation or to ask questions about your own particular needs, an Understanding Super consultation will allow you to model all types of retirement income stream scenarios as well as find out how long your savings are likely to last.
What’s your opinion?
Recent research from AMP suggests a majority of retirees do not understand how Account-Based Pensions work. Is this because they are complex? Or is it because people have saved maximise their balance and are yet to tackle the challenge of actually spending this money?