Australians heading into retirement face a tough decision on how to access their hard-earned superannuation.
The question is: Should you opt for a lump sum, an income stream, or a combination of both?
And just like every broad-based question in life, it circles back to the cliched but truthful answer: "It depends".
That's not ideal for someone seeking a more definitive answer, but what you can do is understand the pros and cons of both routes to obtaining your money. Here's a breakdown to help you make an informed choice.
Options for accessing superannuation
When you retire, you can withdraw your super as a lump sum, convert it into an income stream, or combine the two. Each approach offers unique benefits and trade-offs.
A lump sum gives you immediate access to your entire super balance, which you can use to pay off debts, invest, or enjoy some long-awaited luxuries.
Lump sums are typically tax-free for people aged 60 or above. However, not all funds offer this option.
According to MoneySmart, this superannuation option can be appealing if you have high-interest debts or want to make significant one-off purchases, such as downsizing your home.
But spending large amounts upfront could deplete your super faster than expected, potentially leaving you with fewer funds for later years.
Investing outside super might also expose you to higher tax rates than those within the super system, especially when buying and selling shares or property.
It really depends on what your estimated annual living expenses might be. This includes things like holidays and medical appointments, and what type of retirement you wish for.
It also depends on your final super balance. Larger accounts might consider this option more viable.
What about an income stream?
With an income stream, your superannuation is converted into regular payments, similar to a salary. These payments continue throughout retirement, just like a sinking fund, only potentially invested.
This method offers a steady income, tax-free investment returns, and could help preserve your superannuation for the long term.
Income streams are highly flexible, allowing you to choose payment frequencies and amounts within minimum withdrawal limits.
However, the amount you can transfer to a retirement-phase account is capped at $1.9 million under the transfer balance cap.
Por que no los dos? (Why not both?)
Many retirees opt for a mix of both. Here, you take a portion of your super as a lump sum to cover immediate expenses while leaving the remainder in an income stream for a stable, long-term income.
That sounds like having your cake and eating it. But there are caveats.
Funds are still employed in the super system, meaning they might not be readily available if needed. Some might have more handy uses for the money from an investment perspective.
Again, it is situation-dependent, but there are multiple ways to access the income stream, including an account-based stream and annuities.
According to the Australian Tax Office, there are multiple tax offsets available for the income component as well.
Superannuation takeaway
The decision to take your superannuation as a lump sum, an income stream, or both depends on your unique circumstances.
Each option has pros and cons, so it's worth considering all to ensure your super supports your retirement dreams.
No matter what the case, knowing all the critical facts can help make the best decisions.
