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What's the best thing to do with your super in retirement?

Using your savings more efficiently can give you a better lifestyle at the end of your working life.

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Last updated: 01 March 2021
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Checked for accuracy by our qualified fact-checkers and verifiers. Find out more about fact-checking at CHOICE.

Need to know

  • The Retirement Income Review found that Australians could have more retirement income by making more efficient use of their savings in retirement
  • Choosing a retirement income product may be a way to manage your nest egg more efficiently

Australia's retirement system is designed to have two distinct phases: the accumulation phase (when you're working and building up your super) and the drawdown phase, when you spend what you've built up. 

However, many retired people are confused about how to make the most of their money in the drawdown phase.

The federal government's Retirement Income Review found that "many people misunderstand the purpose of superannuation, believing that in retirement they should only draw on the return from the investment of their retirement savings and not touch the capital amount.

"Yet the system is designed on the basis that people should draw down their savings to support them in retirement."

What you can do with your super

Once you retire and can access your super you have a range of options:

  • Leave the money in your super account (in the 'accumulation phase') until you need it.
  • Take all or some of your super out as a lump sum. 
  • Move some or all of your super into an account-based pension.
  • Move some or all of your super into an annuity (a regular income stream).

You don't need to choose just one of the options.  Many people find a combination of the above best suits their needs.

Your super fund can give you more information on your options as you head into retirement. Many funds have online resources and run seminars for their members about retirement.

When can you access your super?

Once you're able to access your super, you have a few options on what to do with your savings. 

Generally, you can take money out of your super when you're 65.

If you're a bit younger than this, but you've reached what's called 'preservation age', you can also access it. Your preservation age is between 55 and 60, depending on the year you were born. See what your preservation age is.

If you want to take your super out as a lump sum, you'll need to have reached preservation age and also have met one of the following 'conditions of release':

  • Being fully retired.
  • Being over 60 and ceasing employment. 
  • Turning 65 (in this case, you can still be working).

If you've reached preservation age but haven't met any of the conditions of release, you can access some of your super while you continue to work with a Transition to Retirement (TTR) income account.

These accounts allow people working fewer hours to supplement their income. If you're still in full-time work, it can help you save on tax and build up your super as you approach retirement.

However, ASIC says these options can be "complicated" and work best if you're over 60 and have a mid-to-high income.

Keeping your money in super

Although it's possible simply to leave your savings in super, often this won't be the most efficient way to use what you've built up. The Retirement Income Review found that using your assets (including super) more efficiently "can boost retirement incomes without the need to save more during working life".

The system is designed for people to spend their savings in retirement, not just to live off the interest earned and leave the rest to their families. 

The system is designed for people to spend their savings in retirement, not just to live off the interest earned and leave the rest to their families

If you keep your super in accumulation mode, these earnings will be taxed at a maximum rate of 15%, as they were when you were working and accumulating super. You also get discounts for franking credits and capital gains tax from this amount, which reduces the tax you pay - the Retirement income Review found it was closer to seven percent with these discounts.

Even so, leaving your savings in super may not be the most tax-efficient approach, given that you won't pay any tax on income streams in most circumstances.

Unless you're still working, you generally can't contribute any more money to your super once you're 67. If you're between 67 and 75, 'gainfully employed' and meet the work test, you can continue to put some money in.

The money you still have in your super will generally continue to be invested by your super fund and will fluctuate depending on market conditions. A more conservative strategy may suit you better in retirement – your fund can help you with this.

The difference between account-based pensions and annuities

Account-based pensions and annuities are two different types of super income streams.

A key difference is that annuities generally offer a fixed return. They're not linked to the share market or other economic conditions.

Annuities offer you more certainty, but they 'lock in' your money. Account-based pensions give you more flexibility, but come with a higher risk/return. 

Annuities offer you more certainty, but they 'lock in' your money. Account-based pensions give you more flexibility, but come with a higher risk/return

Some account-based pensions may give you only small variations in the income you get. 

Account-based pensions are available from super funds and you can only buy them with your super. Annuities, on the other hand, may be available from insurers or investment managers. You may be able to buy an annuity with either super or other savings (though this may be taxed differently).

What is the balance transfer cap?

There is a limit on how much you can move from your super to other tax-free retirement products. This is called the balance transfer cap.

Currently, the balance transfer cap is set at $1.6 million for everyone. On 1 July 2021 the cap will be indexed, meaning a different cap will apply in different circumstances.

This table shows which balance transfer cap will apply to you.

If you have more super than the balance cap, you can't move it all into tax-free income streams such as account-based pensions or annuities.

Take the money out as an account-based pension

Not to be confused with the Age Pension, this is a product you can buy with the money in your super. Be aware that the terminology can be confusing – it's actually more like converting some of your money into an income stream rather than buying something new. 

Unhelpfully, funds may use slightly different terminology for these pensions. Some funds may call them a 'pension account' or 'pension retirement account', for instance. 

These pensions give you a regular income until your super runs out.

You have some flexibility as to:

  • how much of your super you move into this pension
  • how often you get paid this income
  • how much you get in each payment 
  • how this money is invested.

But there are minimum levels of income you can take out each year. In response to the changed economic conditions caused by the COVID-19 pandemic, the government has reduced the minimum drawdown rates until June 2021.

This option can save money you on tax – if you're over 60, money earned in this option will be tax-free for both investment earnings (the interest earned on money allocated to your pension) and income payments (those you get into your bank account).  

Note that some funds use different terms for these pensions, including 'retirement income accounts'.

Take the money out as an annuity

Another product you can buy with your super to give you a regular income stream in retirement is an annuity. 

This gives you guaranteed income payments, either for a set time (fixed-term annuity), until you reach your average life expectancy, or for the rest of your life (life annuity).

In the case of a life annuity, a key feature is you'll have peace of mind that you'll always have some income (on top of the Age Pension) for as long as you live. This can be valuable if you're worried you will outlive your savings.

Buying an annuity means you have more certainty about what income you'll get in retirement than with an account-based pension. The trade-off is that you have less flexibility. Depending on the annuity you buy, it may be difficult or impossible to change the amount of income you will get or how long the annuity lasts.

Unlike other investments, annuities aren't linked to fluctuations in the share market

If you really need to access your money, you can generally withdraw money as a lump sum in limited circumstances. But if you do this, you may not get back everything you put in. In this way, annuities are somewhat similar to term deposits.

Unlike other investments, annuities aren't linked to fluctuations in the share market. This is both a pro and a con. On the plus side, you'll get a steady stream of income no matter what the economy does, including a downturn. On the other hand, if the share market surges, you won't benefit as much.

As with account-based pensions, annuities bought with your super are tax free if you're over 60.

You can nominate what happens to your fixed-term annuity if you die before it ends. The annuity may be transferred to one or more beneficiaries, such as a partner and/or children. Note that for some annuities the income may be reduced if you die early. 

Retirement Income Review on retirement products

The review found that "little guidance is available to help people choose their retirement income products".

Some respondents to a CHOICE retirement survey in 2020 noted the complexity of retirement products and a lack of competitive options.

Respondents to a CHOICE survey in 2020 noted the complexity of retirement products and a lack of competitive options

Not all funds offer a range of retirement products, but they're being pushed in that direction by a proposed Retirement Income Covenant, which would require funds to consider what kind of retirement income their members need and prefer. This should lead to more retirement products on the market and, ultimately, better retirement income for Australians. This covenant has been delayed by the COVID-19 pandemic.

In summary, the review found that encouraging people to use their assets more efficiently in retirement "would lead to a higher standard of living in retirement".

How do your choices affect your Age Pension?

Remember that taking money out of your super will have an impact on whether you receive the Age Pension or how much you receive. 

The Moneysmart calculator can help you see how you might be affected. 

A Financial Information Service officer can give you more information about this, free of charge. 

This content was produced by Super Consumers Australia which is an independent, nonprofit consumer organisation partnering with CHOICE to advance and protect the interests of people in the Australian superannuation system.

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