Big choice: cash lump sum or income stream?
Once you get to retirement age there are a number of ways to access your super funds – and there are some valuable alternatives to just cashing it in.
There are three options for using your super to fund your retirement:
Income stream – this is an account that allows you to draw on your super, such as account-based pensions and annuities.
Lump sum – you can take your money out of your superannuation fund as a lump sum payment, then live off that.
Lump sum and income stream – this is a blend of the two options above, allowing you to take some money out of your superannuation as a lump sum straight away, while using the remaining balance to create an income stream as ongoing income.
What you might not be aware of is that starting an income stream investment within super, rather than taking your savings as a lump sum, can be much more tax effective. Income streams allow you to draw on your capital and earnings from your super savings – almost like paying yourself a salary.
No lump sum tax is paid when the benefit is used to start the income stream, and the income and capital growth on investments in it are tax free. Any income received is generally tax effective and completely tax free for those aged 60 and over.
If you are looking at full retirement, the retirement income stream option allows you to convert your super into regular income. It provides easy access to your money and may offer tax advantages.
If semi-retirement is your goal, once you have reached retirement age a Transition to Retirement pension (TTR pension) allows you to access your super account balance while you continue to work. With this option you can reduce the amount of hours that you work while supplementing your income with an income stream from your super.
Part or all of your super is moved into a TTR pension account, which you can then access as an income stream. A TTR pension works in the same way as any other pension, except that it cannot be cashed out as a lump sum until you are fully retired or reach a standard condition of release.
Once you start a TTR income stream, the income you earn is not subject to the 15% tax rate that applies to money invested in a pre-retirement super account. This does not affect your ability to contribute to your existing super.
There’s a bit to consider here, so to ensure you’re retiring on your own terms, make sure you explore all options for the best solution, ideally with advice from an expert.