A guide to superannuation income streams

What are super income streams?

When you’re eligible and decide to access your super, you usually have the option of taking your money as a lump sum, or use some or all of the money to create an income stream. Or you may choose a combination of the two.

An income stream from super is a way of receiving a regular income using the money you’ve built up in your super. Super income streams can be paid to you by your super fund, a retirement savings account provider and/or a life insurance company.

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What are the different types of super income streams?

A super income stream can be account-based or non-account based, according to the Australian Taxation Office (ATO). So what’s the difference between the two and how do they work?

Account-based income stream

An account-based income stream, also known as an account-based pension, is where you use some or all of your super money to set up a separate account that pays you an income. This income is a regular payment – the amount and frequency are decided by you – although it may be subject to certain caps. Any money remaining in your super account continues to be invested.

Super funds commonly offer two income stream products: a transition to retirement income stream, for people gradually moving into retirement, and a retirement income stream from super for people who retire permanently. Which product you choose will depend on your personal circumstances and whether you decide to continue to work or not while you receive your super income stream. Keep in mind, though, that the ATO sets different minimum and maximum withdrawal amounts and different tax concessions for the products.

Non-account-based income streams/annuities

A non-account-based income stream from superannuation does not involve an account balance attributed to you.

An example of a non-account-based income stream is an annuity, which guarantees you an income for a set period of time. You buy an annuity with money from your super and this entitles you to receive a regular income stream that can be guaranteed for life, for your life expectancy, or for a fixed term. The amount of income you receive will depend on how much money you have put towards buying the annuity. Payments are usually made monthly, quarterly, half-yearly or yearly.

What standards must super income streams meet?

The ATO sets out certain standards that both account-based and non-account-based income streams must meet each financial year. The standards include:

• A minimum amount must be paid each year determined by your age. For transition to retirement income streams, a maximum amount also applies.

• Payments must occur at least annually.

• An income stream can be changed into a lump sum only in certain circumstances.

• An income stream can’t be paid to a non-dependent beneficiary after the death of the member.

If the standards are not met, the ATO says the income stream from superannuation will stop for tax purposes and it will consider the fund has not paid an income stream during the year.

Pros and cons of an account-based super income stream

If you’re interested in setting up an account-based super income stream then the Australian Government’s Moneysmart website says you need to consider the pros and cons.

The potential pros include:

• Greater flexibility as you can decide the payment amount (within the minimum and maximum withdrawal amounts prescribed).

• Income stream payments are tax-free from age 60.

• You can choose how your money is invested as you withdraw it.

• You can withdraw lump sums at any time, so long as you meet the criteria for doing so.

Potential cons include:

• Investment earnings are not guaranteed and may fluctuate depending on your choice of investment.

• There’s no guarantee of how long your super income stream will last and you may outlive it.

• Your income stream may impact how much Age Pension you’re entitled to receive.

• The amount of money that can be transferred to a tax-free account-based pension is capped at $1.7 million.

Pros and cons of a non-account-based super income stream/annuity

If it’s a non-account-based super income stream, such as an annuity, that you’re interested in setting up, then the Moneysmart website also says you need to consider the pros and cons.

Potential pros can include:

• You can arrange to buy an annuity that provides an income for your whole life.

• You’re paid a guaranteed income that’s not linked to market performance.

• Annuities bought with super money will be tax-free from the age of 60 (tax may apply if you’re aged 55 to 59)

Potential cons can include:

• You can’t withdraw your annuity money as a lump sum.

• You can’t choose how your money is invested, which could be an issue if you want to invest ethically.

• An annuity may pay less than a product that is market-linked.

When can my super be withdrawn?

Before you can set up a super income stream, you will need to be able to access your super.

The ATO says you can withdraw your super when you turn 65 (even if you haven’t yet retired), or reach preservation age and retire, under the transition to retirement rules. There are only very limited circumstances where you may be able to access your super early. Usually, this would be for specific medical reasons or severe financial difficulty.

Your preservation age

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Source: ATO

How much do I need to withdraw from my super income stream?

There is a minimum you need to withdraw each year from your super income stream, says the ATO. The actual amount depends on your age and is calculated as a percentage of your account balance.

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Source: ATO

For retirement income streams there is no maximum amount, aside from the balance of your super account, which you can withdraw. For transition to retirement income streams, the maximum amount you can withdraw is 10% of the account balance per year before you reach the retirement phase.

Does a super income stream impact the Age Pension?

A super income stream may impact your entitlement to the Australian Government’s Age Pension and how much you may receive. Services Australia (formally Centrelink) works out your Age Pension benefit by looking at how much income you get (income test) and how much your assets are worth (assets test). If your income or assets are above certain limits, your pension may be reduced.

When does a super income stream end?

One of the most common ways for a super income stream to end is when the capital (i.e. the money) runs out, says the ATO. Other ways include when the income stream does not meet the super standards, when the income stream is fully changed to a lump sum amount or when you die.

In the event of your death, if there is money still remaining in your income stream account, this will be paid to your beneficiaries – if you’ve nominated any – or to your estate. Moneysmart notes that this super money may be paid as a lump sum. If you’ve nominated a partner or a dependant as a reversionary beneficiary they’ll continue to receive your payments as an income stream until the money runs out.
If the reversionary beneficiary is a child, they will normally be able to receive payments until they are 25 and then they’ll receive a lump sum if there is any money left.

When considering any income stream option you should read carefully any relevant documents including any product disclosure statement (PDS) and target market determination (TMD). You should also consider getting some independent financial advice.

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