Waking to find you’re suddenly thousands of dollars richer seems like a dream. But knowing what to do with your super once you can access it, can be a complex task.
Leaving the workforce can be a jarring process – stepping away from the relative security offered by a regular income to rely on a savings pool that most people, if being honest, have given little thought to since opening their account.
The New Daily turned to Industry Fund Services (IFS) technical, research and advice services chief Craig Sankey to shed some light on superannuation’s less-discussed second phase – the ‘draw-down’.
The ‘draw-down’ phase
Superannuation can be broken into two halves: the ‘accumulation phase’ during which savings are added to grow a member’s savings pool, and the ‘draw-down’ phase, when a retiree finally has access to their money.
The money saved in super is usually sizeable, but according to Mr Sankey around 50 per cent of retirees only draw down the legislated minimum amount each month because they’re afraid their money will run out.
Fortunately, there are two financial products currently available that retirees can use to help mitigate the risk of running out of money – annuities, and account-based pensions.
Annuities provide a guaranteed, fixed-income for life, that is, once your money is placed into an annuity, it will pay a regular income for the remainder of your life. The catch with these products is that once money is placed into them, it can’t be withdrawn, and the income rates on offer tends to be lower than what an account-based pension might provide.
Conversely, account-based pensions – which also pay a regular income – offer higher income rates and flexibility allowing retirees to withdraw cash, but with no guarantee the money will last. Once the money in an account-based pension runs out, that’s it.
While account-based pensions are more common, the popularity of annuities is growing, with the two products being used together to help manage retirement income.
From July 2020, there’ll also be a new option, known as ‘comprehensive income products for retirement’ or CIPRs (pronounced like ‘sipper’).
These products will combine numerous features from both products and were advocated for by government as a way to help retirees make better use of their savings.
Most calculations used to assess the health of Australia’s retirement system are based on the premise that those leaving the workforce own their home when they do so – a situation that’s becoming less common.
For those retiring with a mortgage, it’s possible to take out a lump-sum from super to pay off what’s owed. This is the most common strategy, Mr Sankey said, but as with all things super there’s no silver bullet. Retirees will need to assess their own situation, seeking advice where necessary, to make sure they’re taking the appropriate course of action.
Renters, on the other hand, will simply need to manage their money more cleverly than their home-owning counterparts.
There’s always a safety net
Regardless of how you manage your super, Mr Sankey said it was important to remember that there’s always going to be financial support from the government.
While the age pension is only offered to those who pass the government’s ‘asset test’ (that is, those who don’t have enough savings to maintain an acceptable standard of living without being topped up), the asset test isn’t a ‘once-and-done’ measurement.
Someone who retires with too much to receive a pension can still receive one later down the track if their savings have eroded to a point where the pension is necessary. And there are even part-pensions for those with too much to receive a full pension, but who might still benefit from some top-up money.