Super is not supposed to be locked up forever. Super is intended to be withdrawn and used to finance your retirement. Once you are able to withdraw your super, there are two broad choices about how to do so. Either you can take some or all of your money as a lump sum, or you can take some or all of your money as an income stream. Let’s take a closer look at that second option.
Account-based income streams are also sometimes referred to as ‘account-based pensions.’ The ‘account’ from which the pension is drawn is typically capped at $1.6 million per person. People can typically create a superannuation income stream once they meet a condition of release. Mostly (and hopefully), the condition of release is reaching the preservation age that applies to you. However, there can be times when younger people also satisfy a condition of release for their super. Becoming permanently disabled can be one such time.
The idea of an income stream is that you do not withdraw your superannuation all at once. Instead, you allow some money to ‘trickle out’ each year (hence the term income stream). Within your super fund, the amount that has not been withdrawn remains invested in your preferred form/s of asset.
The super that remains invested can generate further earnings. In this way, a decision not to take super out as a lump sum, but to use an income stream instead, is effectively a decision to maintain at least some of your money invested in super. To encourage people to retain this form of investment, the earnings on money from which a pension or income stream is being drawn are typically not taxed. This means that, as long as you withdraw enough each year to meet the definition of an income stream, income stream recipients can have up to $1.6 million invested in super with the earnings being entirely tax-free.
The minimum amount that needs to be withdrawn each year varies according to your age. Basically, the older you get, the more you need to withdraw. If you fail to withdraw that much money, you can lose the tax-free status of your investments. This ‘minimum trickle’ exists to discourage people from simply hoarding their money. The idea is that we all use at least some of our money to fund our retirement.
Generally, there is no upper limit on the amount that you can withdraw. So, if you find that you need more money in a particular year, perhaps to facilitate an irregular purchase such as a new car or a holiday, you can usually get access to money for that purpose.
The general idea of an income stream is that it allows your super to last longer. Exactly how long the super lasts will depend on the rate at which you withdraw it and the rate at which the money that is kept within super generates returns. Fees paid on your fund also have an impact.
Yes, you can. This is often known as a ‘transition to retirement income stream.’ You still need to have reached your preservation age. But, if you have done so, you can withdraw a portion of your super each year while you keep working. The original idea here was to allow people to cut back their working hours without retiring completely, and replace their lost salary or wages with some of their super. However, these income streams are not classified as retirement phase pensions and have some important differences, including the fact that earnings are taxed and that there are caps on how much can be drawn each year. Accordingly, the amounts you use to commence a transition to retirement income stream do not count towards your transfer balance cap.
Transition to retirement income streams can get quite technical, especially around issues such as your age, so it pays to talk to us if you are thinking about cutting back your work hours and wondering how you might supplement your income for that.
One last thing to consider. If you are drawing some form of income stream and you have a partner, your partner may well be able to continue to draw that income stream even after you pass away. This is not always possible, but if it is available, it can make quite a difference.
So, if you or someone you know is getting to the point where withdrawing super is a possibility, please do not hesitate to get in touch with us. We would love to discuss your options with you.
