What are my options for drawing on super savings?

Account-based pensions

The most common product for a retirement income stream in super is an account-based pension. These must be set up in super and there are advantages to having your retirement income inside super. Around 80% of retired super fund members have one or more account-based pensions.

These products offer flexibility, control and continued exposure to investment markets. They allow retirees to convert part, or all, of their super balance into an income stream while keeping an allocated sum invested.

More than one can be set up, at different times, and with different investment choices, so your investment balance keeps growing while providing income in the short-term. Retirees can choose how much they withdraw, as long as they meet the government’s minimum withdrawal requirements.

Arguably, the greatest advantage of an account-based pension within super is its tax effectiveness compared to investments outside super. Once a super member is fully retired, both the investment earnings and income drawn from an account-based pension in super is tax-free.

One of the disadvantages of account-based pensions in super is that the age-based minimum drawdown rates might not suit your investment timing or income preferences. Investment returns are not guaranteed, and you don’t know how many years of income will be needed.

If you die before the funds are fully drawn, however, your beneficiary can receive the remaining money.

Another option for regular income: annuities

Retirees can also use their super to buy another type of income product called an annuity. There are a few main types of annuities and you can choose if you want the income payments:

• guaranteed over a fixed period of time
• investment-linked over a fixed period or for life, or
• guaranteed for the rest of your life, typically adjusted for inflation.

The cost of the annuity will vary depending on these factors. Annuities provide more certainty both in the payments and timeframe for income, regardless of investment market performance.

In Australia, fewer than 5% of super member accounts are annuities. But that may be changing, as more retirees realise the advantages of including an annuity in their super income planning.

Annuities can be bought using super or non-super money, but using super has the advantage of tax-free earnings and income.

In addition, for Age Pension eligibility, Centrelink only takes into consideration 60% of the value of a lifetime annuity compared to 100% of an account-based pension. This favourable treatment means your super savings can last longer, because your retirement income will be supplemented with more Age Pension.

On the downside, annuities have less flexibility. Once you have committed a lump sum of super to purchase the annuity, you cannot easily convert that back into a lump sum or adjust the annual payment amount.

The income from annuity returns may also not be as high as in an account-based pension, because there is a trade-off between investment returns and guaranteed income.

Choosing the right mix for your circumstances

Retirees may benefit from a retirement income strategy that includes a combination of account-based pensions and annuities, depending on their personal needs and circumstances.

Once aged 67, retirees will also be eligible for the Age Pension, within asset or income limits. More than 60% of retirees receive at least some Age Pension, around 40% as their main income.

Main source of income at retirement

The government Age Pension is the most common source of income for retirees, while 30% of retired women relied on their partner’s income to meet their living costs at retirement.