How to best maximise your income in retirement
As you near retirement, early planning will benefit your future lifestyle
Age matters when it comes to super. By the time you hit 60, you need to start thinking about your retirement strategies. It's a highly complex area with many age- and work-based rules, so the earlier you start planning, the less likely you are to get it wrong.
Generally, you can access super when you turn 60 if you cease a work arrangement. At 65, even if you are working, you can take it as a lump sum or pension.
"If people want to maximise the chances of their retirement assets outliving them, and they've got more than just a little bit in super and they've got other investments outside, they really should go and see a fee-for-service adviser - the earlier the better," says Max Newnham, a chartered accountant and certified financial planner at TaxBiz.
While super earnings are taxed at 15% in accumulation phase, there is zero tax on earnings in pension phase. This makes keeping money in the super environment very attractive. Once you retire at 65 you can't make further super contributions unless you meet a work test.
Newnham says people need to figure out how much they are going to need.
"The Australian Bureau of Statistics says for a couple to just have an existence in retirement, it's about $38,000, which is the combined value of the aged pension. To have a comfortable retirement it's about $60,457. Then they need to work out their other sources of income: is it the age pension, is it other income coming in? Does it make more sense to sell other assets outside super after they've finished full-time employment, decrease their tax and get the money into super?"
Newnham points out that from July 1, homeowners 65 or over will be able to make an after-tax contribution to boost their super from the sale of the family home when they downsize.
"If you have the ability to make this downsizer contribution of $300,000, or $600,000 for a couple, it may be something worth considering down the track," he says.
Last year the rules tightened in terms of how much you can contribute to super, plus a cap of $1.6 million was introduced on pension accounts. This has added further complexity for wealthier fund members with assets inside and outside super.
"Ideally we'd all like our money in a zero tax rate but we can only get $1.6 million into that now," says Claire Mackay, an independent financial planner and tax specialist at Quantum Financial. "Then, if you're forced to take money out, we have to think about the tax rates in your other entities - 15% in accumulation is still not bad."
She says the decisions depend on your tax rates and age. "I've had people come to see me who are in their 70s and their super is in accumulation. They've got more than enough money outside, and 15% is better for them.
"I've got other people who have very low balances in their super fund and they're better off taking their money out and just having it in their personal name rather than having it in super because of the fees.
"You might be thinking about withdrawing money out of super to pay down debt, or to help out family members. It comes down to individual circumstances."
Beware the high fees on a pension
Once you've decided to move into pension phase, you need to tell your fund whether you want your payment made fortnightly, monthly or annually. Also check your life insurance: if you need it, can you move it across? If not, how do you cancel it?
While your existing fund may have been competitive in accumulation, it may not be so in pension phase. "If someone is in a for-profit fund there doesn't end up being a great deal of difference because they're already paying higher fees. But if you're in an industry fund there can be a massive increase," says TaxBiz's Max Newnham.
That comes via the pension administration fee, which is often expressed as a percentage of the value of your super, so the bigger the balance the bigger the fee. Newnham says AustralianSuper caps its charge at $750, which makes it competitive for those with bigger amounts.
SuperRatings says the average buy/sell spread of moving from an allocated account to a pension account in the balanced option is 0.84%, plus a $30 switch fee, or $66 to exit. It also gives average fees charged in pension phase for the balanced option.
Apart from membership fees of $84, the fee charged on $250,000 is on average 1.33%pa.