Two of the most important financial decisions you will make is what to do with your superannuation and how you will fund your retirement. In order to fund the cost of living after retirement, a retirement income must somehow be generated. The right financial advice from an AWS planner can help you generate a retirement income, ensure your assets are invested and ultimately secure a comfortable lifestyle.
When you sit down with one of our financial planners, you will be challenged with questions such as:
- How much money do you require, on a regular basis, to meet your current cost of living?
- What are your plans for retirement? What do you want to do and how much will it cost?
- What age do you realistically plan to retire?
- Will your assets provide the income you need to live comfortably?
- What significant expenditures are you planning now and into the future?
- How much money do you require to be available at short notice for unforeseeable expenses?
- How do you feel about leaving an estate to family members or other causes you support?
- What do you own, what do you owe, and what do you earn?
- From your current income, how much money do you estimate you can save on a regular basis, if at all?
There are two main types of retirement income streams – pensions and annuities.
A pension is the name given to income streams that are payable from superannuation funds. While the funds providing the pension payments may differ, their aim is to provide a regular income to retirees from their superannuation funds.
An annuity is different to a pension because it is generally purchased from life insurance companies. With a pension, you receive pension payments by being a member of a superannuation fund. With an annuity you enter into a contract with a life insurance company where you exchange a sum of money for a series of payments.
There are a number of income stream products available with different features:
Allocated pensions and allocated annuities
Allocated pensions and allocated annuities provide an income stream from superannuation or rollover money. The main difference between allocated pensions and allocated annuities are that allocated pensions are available from superannuation funds, and allocated annuities are purchased from life insurance companies.
Fixed term pensions and fixed term annuities
Fixed term pensions are purchased from a superannuation fund and can only be purchased with ETP money. Fixed term annuities are most often offered by a life insurance company and provide a regular and guaranteed income stream for various periods. These investments may be purchased with either ETP or non-ETP money.
With a fixed term pension or annuity you set the period of time you want the income stream payable; this can be from one to 25 years. Regardless of what interest rates, investment markets or economic conditions do in the future; your fixed term annuity will be guaranteed for the full term.
Complying pensions and annuities
A complying pension is a retirement income product that provides a regular income stream and favourable social security treatment under the income and assets tests. It can be a guaranteed investment (eg life office backed) or a market linked investment. To be eligible for concessional treatment, the income stream must be non-commutable, have zero per cent residual capitol value, and the size of annual payments must be fixed at the outset of the contract.
Fixed term products must commence on or after age pension or service pension age. Commutation of a complying product will only be permitted within six months from commencement, or at any time if transferred to another complying product or used to pay the surcharge liability funds used to purchase that income stream product.
Term allocated pensions and annuities
You can buy a market linked pension or annuity (also known as a term allocated pension or annuity) with a lump sum from a superannuation fund, or paid from an SMSF, to provide you with an income during your retirement.
Given the complexity of today’s financial planning environment, professional financial planning advice is essential in order for the appropriate strategy to be chosen to meet your financial needs.