According to Colonial First State research, in 2016 more than 83% of retirement benefits were taken as an income stream. The research predicts that this will rise to over 95% by 2025. Given their increasing popularity, let’s take a look at what super income streams are and how they work.
What are super income streams?
When you become eligible to withdraw your super, depending on your circumstances, you may have the option of taking it as a lump sum, as an income stream or doing a combination of the two. A super income stream is a way of receiving regular income using the money you have built up in your super. Super income streams can be paid to you by your super fund, retirement savings account provider and/or a life insurance company. Popular examples of super income streams are account-based pensions and annuities.
What are the different types of super income streams?
Account-based income streams
A super income stream can be account-based or non-account based. The most common type is account-based income streams, also called account-based pensions. As the name suggests, this is where the income stream is paid to you from a super account that is held in your name. You receive a regular payment – the amount and frequency is decided by you (although it may be subject to certain caps) – and the remainder of your super continues to be invested just like it was when you were working, or before you started receiving the income stream. This will continue as long as there is money in your super account.
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 (for people who are retired 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 Australian Taxation Office (ATO) sets different minimum and maximum withdrawal amounts and different tax concessions for the products.
Non-account based income streams/annuities
In comparison, a non-account based income stream does not involve an account balance attributed to you. An example of a non-account based income stream is an annuity. Unlike account-based income streams, annuities guarantee income for a set period of time. You buy an annuity with money from your super or other savings and this then 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 from this will depend on how much money you have put towards purchasing the annuity. Payments are usually made monthly, quartley, half-yearly or yearly. Annuities are not dependent on investment performance and the ATO does warn that in some cases annuities may pay less compared to a market-linked investment.
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, as prescribed by the ATO, must be paid each year. This minimum amount will typically be dependent on your age. For transition to retirement income streams, a maximum amount also applies.
- Payments must occur at least annually.
- An income stream can only be changed into a lump sum in certain circumstances.
- An income stream cannot 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 will stop for tax purposes and they will consider the fund to not have paid an income stream during the year.
Pros and cons of account-based super income streams
Potential benefits of choosing an account-based super income stream can include:
- Greater flexibility as you can decide the payment amount (within the minimum and maximum withdrawal amounts prescribed).
- According to the ATO, income stream payments are tax-free if you are over 60 years old. It also states that investment earnings are taxed at a maximum rate of 15% for transition to retirement income streams and are tax-free for retirement income streams.
- 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 being able to do so.
Potential disadvantages of choosing an account-based super income stream include:
- Investment earnings are not guaranteed and may fluctuate depending on your choice of investment.
- There is often no guarantee of how long your super income stream will last and you may outlive it.
- It may have an impact on how much Age Pension you are entitled to receive.
- The amount of money that can be transferred to a tax-free account-based pension is capped. The cap is $1.6 million as at the time of writing.
Pros and cons of non-account based super income streams/annuities
Potential advantages can include:
- You can arrange to purchase an annuity that provides an income for your whole life.
- You are paid a guaranteed income that is not linked to market performance.
- According to the ATO, annuities purchased with super money will be tax free from the age of 60. If you are under 60, the taxable portion of the annuity will be taxed at your individual income tax rate, however, you will receive a 15% tax offset.
- According to the ATO, you also won’t have to pay tax on investment earnings.
Potential disadvantages of choosing an annuity:
- You cannot withdraw money as a lump sum.
- You cannot choose how your money is invested. This could be an issue if you want to invest ethically.
- According to the ATO, in the long run, an annuity might pay less than a product that is market-linked.
When can super be withdrawn?
Before you can set up a super income stream, you will need to be able to access your super. According to the ATO, super can be withdrawn when you: turn 65 (even if you haven’t yet retired); when you reach preservation age and retire; when you reach age 60 and leave a job; or under the transition to retirement rules (where you reach preservation age and continue to work while receiving a transition to retirement income stream). There are only very limited circumstances where you might be able to access your super early. Usually, this would be for specific medical reasons or severe financial difficulty.
Here’s a table that sets out when your preservation age will be:
| Date of birth | Preservation age |
|---|---|
| Before 1 July 1960 | 55 |
| 1 July 1960 – 30 June 1961 | 56 |
| 1 July 1961 – 30 June 1962 | 57 |
| 1 July 1962 – 30 June 1963 | 58 |
| 1 July 1963 – 30 June 1964 | 59 |
| From 1 July 1964 | 60 |
Source: ATO
If you’re comparing Superannuation funds, the comparison table below displays some of the products currently available on Canstar’s database for Australians aged 30-39 with a balance of up to $55,000, sorted by Star Rating (highest to lowest), followed by company name (alphabetical). Use Canstar’s superannuation comparison selector to view a wider range of super funds.
Fee, performance and asset allocation information shown in the table above have been determined according to the investment profile in the Canstar Superannuation Star Ratings methodology that matches the age group you selected.
How much do you need to withdraw from your super income stream?
According to the ATO, you need to withdraw a minimum amount from your super income stream each year. This amount will depend on your age and is calculated as a percentage of your account balance.
| Age | Minimum % withdrawal |
|---|---|
| Under 65 | 4% |
| 65-74 | 5% |
| 75-79 | 6% |
| 80-84 | 7% |
| 85-89 | 9% |
| 90-94 | 11% |
| 95 or over | 14% |
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.
Do super income streams impact the Age Pension?
A super income stream may impact your entitlement to the Age Pension and how much you may receive. Centrelink works out your Age Pension by looking at how much income you get (income test) and how much your assets are worth (assets test). Centrelink then uses the test which produces the lowest entitlement to determine your Age Pension. If your income or assets are above certain limits, your pension may be reduced.
As at January 2019, the Department of Human Services states that if you are a single person and your income per fortnight is over $172, your pension will reduce by 50 cents for each dollar over $172. So for example, if you earn $180 per fortnight, your pension would be reduced by $4.
When do super income streams end?
According to the ATO, the most common ways to end a super income stream are when the capital runs out, when the income stream does not meet the super standards, when the income stream is fully changed to a lump sum amount, or when the member dies.
In the event of your death, if there is money still remaining in your account, this will be paid to your beneficiaries or estate. Typically, this money must be paid as a lump sum, but if you have nominated a dependant as a reversionary beneficiary (a person who will receive your super income stream payments) then they will continue to receive your payments as an income stream until the account runs out. If the reversionary beneficiary is a child, they will normally be able to receive payments until they are 25 and then they will receive a lump sum.
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