It is important to understand where this income will come from, how long it will last, and whether your retirement investments are on track, or whether some adjustments need to be made to get you there.
Work out how long your super or account-based pension will last
If you’ve transferred your super to a pension account already, then you can use the MoneySmart calculator to help estimate how long your pension will last. And if you haven’t, we recommend you speak to a financial adviser who can discuss with your different considerations that will impact how long your account-based pension will last.
Here are some of the fundamental things you need to know about a couple of other retirement income options.
Account based pensions
How long an account-based pension lasts will depend on:
- the amount of initial capital invested
- the return from the underlying investments
- the amount of fees charged
- how much you withdraw as income each year
The tax benefits of account-based pension are:
- you don’t pay tax on pension payments from age 60
- if you’re aged between preservation age and 59, the taxable portion of your pension payments will be taxed at your marginal tax rate less a 15% offset
- you don’t pay tax on investment earnings
In some cases, the underlying investments for most pension accounts are chosen to minimise fluctuations but still provide a bit of growth.
Defensive assets
Growth assets
These include equities and property. They’re usually open to market fluctuation but tend to provide higher returns over the long term.
Generally, defensive assets provide you with a relatively steady return and, therefore, income. However, some growth assets are usually needed to keep your funds growing during your retirement, so they last longer. With an account-based pension, you can mix defensive and growth assets to a ratio that you’re comfortable with.
Annuities
Some annuities could provide you with regular and guaranteed income for either a fixed period or for life. They are more secure than account-based pensions as your income is guaranteed regardless of what the share market and interest rates do.
The downside is that you’re locked into the agreed income for the whole term or the rest of your life. If your circumstances change, you generally can’t withdraw a lump sum. A lifetime annuity also has no residual capital value, which means you can’t leave it to someone in your will.
The best of both systems
This means it becomes increasingly important to protect your super growth funds from market falls while still allowing them to grow if the market goes up.
Other factors to consider
When it comes to the Age Pension, there are several rules to determine your eligibility. You can learn more by visiting Services Australia but some of the basic rules are:
You must have reached your Age Pension age, which is currently 66 years and 6 months for people born from 1 July 1955 to 31 December 1956, inclusive. If your birthdate is on or after 1 January 1957, you’ll have to wait until you turn 67. This will be the Age Pension age from 1 July 2023.
- You must be a resident of Australia
- You must pass income and asset tests
If you don’t meet the income and assets tests to be eligible for the Age Pension, you may be able to access the Commonwealth Seniors Health Card (if you pass an income test). This card provides affordable medicine, bulk billed doctor visits and depending on what state you live in, there may be some other concessions that you’re entitled to. You can find out more from Services Australia.
From 1 January 2023, you can suspend your Age Pension for up to 2 years if you get Australian employment income. Read more about working while getting Age Pension.
