BY MSI TAYLOR WEALTH MANAGEMENT
LUMP SUM VS INCOME STREAM
One big question as you’re planning for retirement is whether to take your super as a lump sum or set up an income stream. The correct choice for your individual needs can literally be worth a fortune.
With the various transition to retirement options that have come about thanks partly to the demands of the ageing population, the choices of how to receive your superannuation funds have become more complicated. At the same time, if planned well and according to the specific needs of the individual, these options have the potential to offer greater financial results.
Those that have reached preservation age may have the choice of working part-time and topping up their salary with an income stream from their super fund. Or they may choose to leave work and receive instead an account-based income stream, meaning the account itself increases and decreases as investment earnings come in and fees and income go out. Another choice is a non account-based income stream that instead guarantees a fixed level of income for life, or for a fixed term.
Then of course it may be possible to withdraw the entire amount, or just part of the amount, from the superannuation fund. Many decide to go for a mix of lump sum and income stream. All options, in specific circumstances, can make good sense.
How do you figure out what is right for you? First you should consider tax benefits. Once you reach preservation age all funds withdrawn from the superannuation environment should be tax-free. But when you invest those funds outside of super there will likely be new tax implications on investment earnings. Many income-stream products such as pensions and annuities however, offer a tax-free environment for earnings. In this way people are encouraged to convert their super balances into income streams.
But what if you are retired and have a healthy superannuation balance but your partner is still working and has little superannuation? Under certain conditions it is possible to withdraw the non-preserved portion of your super funds and invest them in your partner’s fund, keeping in mind their non-concessional contribution rates. This can be a useful way to optimise your age pension eligibility.
The question of lump sum vs income stream has no right or wrong answer, only individual solutions that are developed once all facts – including account balances, desired lifestyle, health, your partner’s financial situation, and much more – are taken into account. But it is a process worth going through with your financial adviser as a customised solution can possibly help your future lifestyle.
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