Retirement income streams
Retirement income streams are designed to replace the regular income earned during your working life.
Like a wage, payments from income streams are generally paid net of tax and a PAYG payment summary is provided (if required) to lodge with a tax return. Because of the regularity of income payments, income streams can help with retirement budgeting as you can choose the frequency of your payments and budget in the same way as you would have during your working life.
The government has introduced tax incentives to promote the uptake of retirement income streams in an effort to ensure that retirement savings last as long as possible.
How do retirement income streams work?
Retirement income streams are purchased with a lump sum which is then converted to income payments over a fixed or agreed term or until the balance reaches zero.
Since 1 July 2007 there are two main income stream products:
- Account based income streams – such as Telstra Super RetireAccess®
- Non-account based income streams – such as life annuities.
If these products are offered by super funds and therefore purchased with super - income payments and investment earnings are tax-free to those aged 60 or over.
If these products are offered by life companies and purchased with money outside of super – income payments and investment earnings will be taxed at the applicable Marginal Tax Rate (up to 45% plus Medicare Levy).
Working through the various retirement income streams on offer can be confusing. Below we discuss the features and benefits of the most popular retirement income streams that are currently offered by super funds and other financial institutions.
Account based income streams
Account based income streams used to be known as allocated pensions when offered by super funds or annuities when offered by life companies. They are extremely flexible in that they allow a choice of payment frequency, payment amount (above a minimum) and usually investment choice.
Account based income streams provide an income based on the initial investment and income payments continue until the balance of the account reaches zero. If you die before the balance is exhausted, a lump sum can be paid to your dependant or you can arrange for the pension to continue to an eligible beneficiary. See Estate Planning for more information.
One of the reasons this type of income stream is so popular is that it allows account holders to make withdrawals as they choose, provided they receive at least the minimum income payment amount each financial year.
Also, because you can choose how your money is invested you can adopt an investment strategy with a level of risk that you are comfortable with. The downside to this is that you bear the investment risk, but with the right advice and a good understanding of how long your income stream needs to last, you can implement a strategy that aims to beat inflation and provide for your lifetime needs. See Investing in retirement for more information.
Account based income streams can also be accessed by people who are still working provided they are over 55 years of age, see Transition to retirement for more information.
Non-account based income streams
Non-account based income streams include life expectancy and lifetime pensions offered by super funds, and defined benefit pensions which are payable under some government or corporate defined benefit arrangements. Defined benefits offered by Telstra Super do not convert into non-account based income streams.
Non-account based income streams are referred to as life expectancy and lifetime annuities when offered by life companies.
Non-account based income streams do not have an account balance from which income payments are drawn. These income streams generally exchange an agreed purchase price for an income stream over a fixed period or in some instances for your lifetime. These payments are guaranteed to be payable by the organisation providing the product. Due to the lower risk involved in these products (the investment risk is born by the super fund or life company) they tend to be much less flexible than account based income streams.
Telstra Super RetireAccess offers the flexibility and investment choice of an account based income stream and:
- One low administration fee of just 0.6% pa (no entry or exit fees, no commissions).
- Administration fee rebate on the amount of your balance that exceeds $500,000.
- Expert financial planning advice at no additional cost.
- On-going personal service.
- Competitive investment management fees.
- A broad range of investment options for the conservative through to the aggressive investor.
- Four free investment switches each financial year.
- Automatic* death insurance base cover for just $1 per week.
- Apply for any amount of death cover**.
For more information on Telstra Super RetireAccess, visit the Join Telstra Super RetireAccess pages. For a free financial planning appointment with Telstra Super Financial Planning to discuss your retirement options you can call Telstra Super on 1300 033 166 or request an appointment online.
*If aged under 75. Conditions apply.
**Subject to approval by the insurer.