Taking your super as a lump sum might be tempting, but it won't be the best option for everyone.
You've probably spent much of your working life accumulating super. So, when the time comes and you're able to access it, you might be wondering whether you’d be better off taking the money as a lump sum, income stream, or even a bit of both.
To help you make an informed decision, we’ve pulled together some info regarding trends in Australia, what options are on the table and some tax implications worth considering.
Super trends in Australia
In Australia, only around 16% of all super is taken in lump-sum payments, with the majority of that money used to pay off home loans, renovate, buy a new property, invest or clear other debts1.
Lump sums are also more often taken by people with relatively smaller super balances. Over 90% of people with up to $10,000 and around 30% of people with between $100,000 and $200,000 in super take their money as a lump sum2.
Those with higher balances tend to move their super into income stream products, with account-based pensions (or allocated pensions) the most commonly used in Australia3, with annuities also an option.
Taking a lump sum
If you’re thinking about taking your super as a lump sum, consider the following:
Making your money last
A lump sum could help you to pay off your home loan or other outstanding debts, but you also need to think about what you’ll live on if you have no super left.
The Age Pension may be one option, although if you’re pinning your hopes entirely on government support, you should consider the sort of lifestyle it will fund.
September 2017 figures from the Association of Superannuation Funds of Australia show a 65-year-old couple retiring today needs an annual income of $60,457 to fund a ‘comfortable’ lifestyle in retirement, assuming both people are relatively healthy and own their home outright4.
By comparison, the maximum Age Pension rate for a couple is currently $35,573.20 annually5.
Possible tax implications
If you’re going to take a lump sum you should also look into tax rules. If you’re over age 60, super money you access will generally be tax free, but if you’re under 60, you might have to pay tax on your lump sum.
Another thing to think about is if you invest the money, depending on where you put it, you may be taxed on the interest you make, or possibly the capital gain. Whether taking your super as a lump sum is tax-effective, or not, will depend on your individual circumstances.
Collecting a regular income
If you’re thinking an income stream in retirement would be more suited to your needs, an account-based pension could be a tax-effective option.
Note, if you’re converting your super into an account-based pension to derive an income in retirement, the most you’ll be able to transfer into it is $1.6 million.
Other things to consider include:
Having access to your money
Typically, there is no limit to how much you can withdraw from an account-based pension. So, in addition to receiving periodic payments, you can choose to withdraw some or all of your money as a lump sum.
Each year however you’ll need to withdraw a minimum amount. This amount is calculated based on your age and will be a percentage of your account balance each year.
Possible tax implications
By moving your super money into an account-based pension, your money will not be exposed to the tax rules that apply to money held outside of super. This means:
- You will not be taxed on investment earnings within your fund
- From age 60 you won’t pay tax on account-based pension payments you receive
- If you’re between preservation age and age 60, the taxable portion of your account-based pension will be taxed at your marginal income tax rate, less a 15% tax offset.
Whether an account-based pension is tax effective will depend on your individual circumstances.
Investment control and earnings
Investment returns from an account-based pension are tied to movements in investment markets. And, as an account-based pension is based on the super you’ve saved, it doesn’t guarantee an income for life.
You can generally choose from a range of investment options, and an investment manager will be making the day-to-day investment decisions. Note, a broader range of investments may be available depending on the type of account-based pension you have.
Weighing up your options
There’s a lot to weigh up when deciding how you’ll use your super. To determine what’ll work best for you, speak to your adviser and if you don't have one, call us on 131 267 or use our find an adviser search engine to locate one near you.
For further information, the following articles may also be of interest:
- Making sense of account-based pensions
Dealing with being asset rich and cash poorRead more
6 ways to stay active and healthy in retirementRead more
The financial and lifestyle upsides to saying sayonara to your adult kidsRead more
How to budget for your social life in retirementRead more
9 retirement thought starters when you're in or nearing your 40sRead more
Would you like to retire by 40?Read more
This information is provided by AMP Life Limited ABN 84 079 300 379 (AMP Life). It is general information only and hasn’t taken your circumstances into account. It’s important to consider your own circumstances and read the relevant Product Disclosure Statement before deciding what’s right for you. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you. All information on this website is subject to change without notice. Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any financial decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.