OK, so you are about to retire soon and you want to find out about
how to set up your pension fund
or maybe you have been retired for a while but you want to improve your fund.
Now if this is you this video is for you.
In this video I will answer the most common questions.
What is pension fund?
How can you start one?
How do they work?
And whether you can contribute to one?
Now watch this video till the end because then I will tell you,
the most important benefits of pension funds
and what actually you can do to make your pension fund last as long as possible.
My name is Katherine, I am a Certified Financial Planner and my specialty and passion is
helping people to retire better by implementing really smart strategies
that can create financial security and security of your retirement income for life.
So if this is something of your interest please Like this video
and SIGNUP to my channel and HIT that little BELL,
so you will be notified every single time there is a new video coming out.
If you are retired already or if you are in the process of preparing yourself
for this exciting ready stage in your life, please watch that video: "HOW LONG WILL YOU LIVEIN RETIREMENT",
As you really need to know how long your money should last.
OK, so let's dive in. What is a pension fund?
Superannuation pension funds are created by transferring your superannuation savings
from your accumulation stage - and this is where your employer contributions
and your personal contributions have been saved and invested over the years -
into the retirement income stream.
And one of the types of retirement income streams are pensions.
The most common type of pension fund in Australia is account based pension,
otherwise known as allocated pension.
To start your pension fund you need to meet preservation age
which is between 55 and 60 depending on your date of birth
as well as you need to meet conditions of release.
So we will go over those conditions of release now - this is just a fancy name
of conditions that you really need to meet in order to start your income stream.
So those conditions of released are: - you have reached your preservation age and you retired.
- Or you have met your preservation age and you started transition to retirement.
Now that is under slightly different rules so I will prepare a separate video on that subject.
- You have officially stopped working on or after your age of 60.
And even if you pick up some kind of work or you start employment afterwards that's fine,
- or otherwise you turn the age of 65,
and at that point it doesn't really even matter whether you stop working
or you continue working you don't have to officially retire.
Just the fact that you reach age of 65 allows you to start your retirement income stream.
- Another one unfortunate if you become permanently incapacitated
- or diagnosed with the terminal medical condition
- or if you pass away.
Obviously we don't want to meet the last two conditions but as long as you meet any of those conditions,
you can actually transfer your superannuation savings to your retirement income stream.
And one of those is a pension fund.
By meeting those conditions of release you will also be able to make capital withdrawals,
whether that's partial or full withdrawals.
Now that is really not recommended at all!
So, how does a pension fund work?
After you have met all those requirements and now you are ready to start your pension fund,
to start receiving an income.
This is a regular income stream that can be designed to your needs.
First of course, you need to decide which particular superannuation company you want to use,
in order to hold your pension savings.
Then you have to decide how this money needs to be invested
so you need to create an investment portfolio.
This is actually beyond the scope of this video but,
wright YES underneath my video to let me know that this is a topic
you would like for me to explore and prepare another video for you.
Now important information for you here is, our government introduced a limit
how much money can be transferred to a pension fund, so please stick to those limits.
If you go overboard it will be subject to very hefty penalty.
That limit is $1.6 million.
If you have more than that in your super fund please contact me,
because you really need to discuss it. The situation becomes a little bit more complex,
otherwise if you do have a financial planner, speak to your own financial planner
to discuss it properly.
Now once your savings are in a pension account you need to draw at least a minimum payment,
Which is determined really by your age.
For example if you are below the age of 65 you need to draw 4% of your account balance.
This is calculated by your trustee on the 1st of July of every new financial year.
If you are between the age of 65 to 74, that number rises to 5%
and it keeps on rising with your age.
Financial years 2019/20 and 2020/21 we have special rules due to COVID market crush.
I've created another video that explains those rules and also explains what steps you can take
in order to participate in recovery and help your fund grow back to their proper values faster.
So check out my video please.
Another question that I often get is: How can I contribute to a pension fund?
No, you cannot. Pension funds only accept superannuation money.
So, you can only roll over money that you have in your super fund into the pension.
You cannot actually contribute directly to the pension fund.
If you want to have more money in a pension fund you need as I said,
first contribute to the superannuation.
And you have to understand the limits
and also you have to decide whether to contribute money to super pre or post tax,
because that will make a difference to the outcome.
Now, that again is becoming a little bit more complicated so,
if you need to understand the tax issues please contact me directly,
otherwise speak to your financial planner.
As you can tell, this is a very long video, but I do hope it is helpful and
as I promised at the beginning, now let's discuss,
what's the big deal about all those pensions?
And why you should really pay attention to this, and should you really bother?
The biggest benefit of the pension fund is that the income that you derive from pensions,
or any income stream that is created with superannuation money
apart from the TTR that I mentioned before is tax-free.
Now imagine you invested $1Mil in your pension fund and now you're deriving 4%.
That means $40,000 tax-free.
If you were to earn that money or derive the same level of income from cash,
that you will have to pay close to $5,500 in tax.
If on the other hand, let's say you derive 5% from $1Mil
then your income is $50,000 tax free for life.
Again if you were to earn the same income from let's say Term Deposit
then your tax level is close to $9,000
And the same if you earn that money from occupation, $9,000.
So that's a huge difference as a net income that you can spend
for your living on the annual basis.
Now another benefit of the pension fund that it really works a little bit like a wage,
so you can decide how often you want to receive it.
Your pension fund might be paying you income on the monthly, quarterly, half- yearly or annual basis.
Pension funds are very long-term income provider,
but they are based on your life expectancy . They are not lifetime incomes.
And they are not guaranteed. I get asked constantly:
"Katherine how can I prolong life of my pension fund? How can I make sure that it lasts as long as possible?
Well, number 1 - Improve starting balance.
There are a lot of strategies to ensure that you contribute to the superannuation as much as you can.
Number 2 - Make sure that every single year you only draw the minimum amount allowable.
Once you start drawing more there is less money that stays in your pension fund
and it will just keep on dropping in value.
Number 3 - Reduce any capital withdrawals.
Well one thing that I keep saying is to make sure that you have
sufficient cash balance sitting in a cash security account.
That is for your rainy day and this way you can really minimize any withdrawals from your pension fund.
Number 4 - Improve your fund performance.
What that means? Well create a really nicely, beautifully diversified investment portfolio.
Don't just accept the default fund. You really have to do a little bit of research,
as to what type of funds work together , and what type of funds will provide you with the best possible returns.
Number 5 - Don't be too conservative.
As I've told you in the other video about longevity, your retirement, will be
very, very long one so make sure that your fund can perform to provide you
with income for as long as possible.
And number 6 - Watch out for all the unnecessary fees.
Fees are necessary they will always exist in the fund.
You have to pay for the trustee, you have to pay for administration,
you have to pay for it for performance.
The fees that bring you real benefit and for example that might be a fee for your financial planner.
After all this is the person that is looking after your investment portfolio.
And this is the person that provides you with ongoing care and ongoing support
and strategies as to how to maximize year after year your benefits.
So there are certain fees that you can look into and reduce them or remove them altogether,
and there are others well some services that you just have to pay for.
So, that's how I believe you can really prolong life of your pension fund.
Now, all those details really need to be taken into consideration
when you are preparing yourself for that retirement
and this is why, I think, honestly, that the full checkup by a specialist is absolutely crucial at that time of your life,
to ensure that you have the best benefit for the remainder of your retirement.
OK, so that was a pretty solid overview of pension funds
I hope you found this video informative and thank you for listening to me.
I'm looking forward to be talking to you next week and in the meantime take care and bye