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When you are working and contributing to your superannuation it is said to be in the “accumulation” phase. When you retire and draw income from your superannuation it is now said to be an “income stream” and is in the “pension” phase.
When you retire what do you do with your superannuation fund? Cash it in and put it in a term deposit? Cash it in and buy investments? There may be reasons why you need access to a lump sum, such as debt repayment or the four wheel drive to tow the caravan but we highly recommend that you consider the “income stream” options BEFORE you do anything with your superannuation. Some of these attractive options, such as an account based pension, are only available with superannuation money. Once you cash in your fund it isn’t superannuation anymore and you may not qualify to put it back into superannuation.
An account based pension is the most popular income stream choice selected by our clients as it is relatively simple and very flexible and crucially it is completely tax free. Yes, tax free. The fund pays no tax on its earnings and if you are 60 or over, you pay no tax on the income you draw. That sounds pretty attractive already. You are free to invest in the same way as any superannuation fund can invest and you can vary the level of income, make lump sum withdrawals or change your mind and cash the Account Based Pension in completely any time you want to.
There is a requirement to draw a minimum level of income. If your fund generates a return larger than the income you draw, then the balance increases and obviously the balance falls if you spend more than you make.
We recommend that our clients hold enough cash in their account based pension portfolio to cover their income need for an extended period of time to manage sequencing risk. If you have market related investments in your retirement income portfolio, we don’t want to cash them in during market downturns and crystalise a loss.
Because an account based pension is so flexible on the level of income you draw and the investments you choose, there are no guarantees on how long your money will last. Longevity risk is the term for living longer than your retirement income.
We take the responsibility of managing your money very seriously when you are in the “pension phase”. This is the pointy end, this is why you saved and you don’t have time to save it up again.