Big part of my videos on this channel About Retirement TV
is explanation of how to be best prepared for retirement income-wise,
and how to structure your income for the best outcome of your cash flow,
maximising Age Pension, minimizing tax in retirement,
as well as ensuring that your assets will last the distance and will support you for as long as you need it.
And let's not forget that many families want to leave some kind of financial legacy
for children or grandchildren, which also requires appropriate planning.
But only now, I realised that I have never actually gone through the types of income streams
that are available to you in retirement and how to know good and bad of each one of them.
So, let's start this topic today.
My name is Katherine Isbrandt from About Retirement, I am Certified Financial Planner
and you are watching About Retirement TV, the place to get all the information you need
to start preparing for your retirement or to improve it if you have already retired.
The question isn't at what age I want to retire it is at what income, George Foreman.
In Australia, we generally have 4 types of retirement income streams, otherwise called pensions:
1. Transition to Retirement
also known by the name of TTR pension.
This is kind of pre-retirement income stream, used in particular situations:
to help you either slowly get ready for your retirement
while reducing your working hours and supplementing your income from TTR pension,
or using to boost your superannuation and reduce your income tax.
I have a full video explaining how TTR pension works in details, so check out my video:
"Can I access my super and continue working?"
This could be a fantastic retirement strategy for some,
so if you really want to boost your retirement savings and income,
feel free to contact me to discuss if it could assist you, in your situation and in improving your retirement planning.
2. Account-Based Pensions
also known as Allocated Pensions - this is what we are talking about today.
3. Annuities
this type of a retirement income stream can be very helpful, especially if you are a more conservative investor type.
It can provide a great deal of income certainty, sometimes assist with improving your Age Pension benefits,
but due to many options and choices can be pretty complex.
Therefore, the outcome could be extremally positive for your retirement and your income longevity,
but if implemented incorrectly it can introduce a great deal of headache.
We will be discussing annuities in my future videos.
And 4. Age Pension
you will find 15 videos fully dedicated to explanation of Age Pension system in Australia,
starting with the most popular video on my channel:
"9 ways to legally hide money from Centrelink Age Pension".
I'm sure that if you watch all those videos, your understanding of the Age Pension system will be so much better and clearer.
But for the best results, always get advice from a specialist retirement planner.
As mentioned before, our today's chat is all about Account Based Pensions,
also known as Allocated Pensions.
This is the most popular type of a retirement income stream
provided by most superannuation funds.
So what is an Account-Based Pension?
If you have superannuation savings and you reach your preservation age,
you can change your superannuation from accumulation phase to a pension phase.
and start receiving a regular income from your superannuation pension account.
If you don't know what preservation age is, and how it works,
please watch my video: "When can I access my super?" to get all the answers.
Account-based pension provides regular payments that are flexible and tax-effective during your retirement.
It is regular, as you can decide how often you wish to receive your income, weekly or fortnightly.
But please be aware that not all super funds provide income that frequently.
It can be paid monthly, quarterly, semi-annually or annually.
This is your choice.
Income is flexible, so you can choose the level of income you want to receive.
There is a government prescribed minimum that has to be pay out to you, which is based on your age:
As you can see in the table if you are aged between 55 and 64 the minimum annual payment has to be 4%.
If you are between 65 and 74 your minimum is 5%.
And if you are between 75 and 79 the minimum is 6% and so on.
During COVID market turbulence, the government allowed for a 50% reduction of that minimum for retirees who could afford it,
to help with lower assets withdrawals to cover those income payments.
This way you were able to benefit from market rebalance and investment earnings,
which happened really surprisingly fast.
If you are a retiree who took advantage of this reduction you have done really well.
It was a very smart decision that will prolong life of your income stream for few extra years.
Allocated pensions do not have a maximum income payments, this is your choice
and you can withdraw as much as the full balance of your pension.
But please don’t do that, unless there is an urgent and very important reason, or this is part of well-designed retirement plan.
So how does allocated pension work?
You commence an account-based pension by rolling over
the specific amount of your existing superannuation account to a pension account.
Allocated pensions don't accept private money, only superannuation money.
Once commenced, you cannot add any additional savings.
As I mentioned before, you decide on the level of income you wish to receive,
as long as the pension account pays out at least the minimum payment.
The minimum payment is counted on 1st of July every single financial year as a percentage of your balance on that day.
That percentage is based on your age, so please refer to the table I've just explained.
This is the reason why your pension payments will keep on changing from year to year
if you receive the minimum prescribed income as your total balance of the pension changes from year to year.
How is account-based pension invested?
Investing in an account based pension is a positive and a negative at the same time.
The positive is that your money is invested in a chosen by you portfolio, therefore invested in the market.
The negative is that your money is invested in the market.
As you can see market can introduce a very positive and a very negative outcome for your income stream,
so you have to choose your investments wisely.
Picking a portfolio out of the hat, just because this is what is being advertised by the super fund on TV
is not a very smart strategy.
Your investment portfolio needs to match your risk profile,
otherwise you will be under a constant stress over underperformance, volatility, and investment risk
How long will my Account-Based Pension last?
This is exactly where your account-based pension falls short.
There is no guarantee how long your income will last.
What's worse the outcome is not only dependent on the level of income you draw year after year,
but on the level of returns of your pension fund - and you really have no control over this part of your pension behaviour.
What's worse, it very much depends on the order of such returns, and that is known as a sequencing risk.
Surprisingly very few people watched my video: "Investment risk in super".
The investment risk in superannuation and subsequently in your pension fund,
I think is greatly underestimated and misunderstood altogether.
And if this is you, please get professional advice as to how to set up your portfolio for the best investment outcomes for you.
What are benefits of account-based pension?
1. Investment earnings are tax -free, that however, does not apply to a Transition to Retirement type of pension.
2. If you are over the age of 60, your pension payments are generally tax-free.
For this reason, I don't recommend starting the pension account before you reach age of 60.
3. Also, if you are over the age of 60, any lump sum withdrawals are generally also tax-free.
And 4. As listed above, you can vary your income payments and investment portfolio is subject to your choice and your decision.
So what are negatives of account-based pension?
1. Lack of income certainty
2. Market volatility of investment returns
3. Returns and level of income are not guaranteed to last for as long as you might need to.
What happens to your account based pension after you die?
When setting up a superannuation account or your pension account,
it is a good practice and frankly it should be one of your responsibilities
to prepare the Superannuation Death Benefit Nomination.
This is to ensure that your super or pension savings will be paid to the right beneficiary,
the beneficiary of your choice.
You can find the full explanation of what happens to your super and your pension by watching:
"Who gets your super when you die?"
also please watch: "Super Death Benefit gone terribly wrong"
to see what can happen to your savings if you don't follow the rules and don't receive appropriate advice.
So how do you feel about the account-based pension?
Do you believe this is an appropriate income stream for you?
Do you feel comfortable setting it up and choosing the correct investment portfolio?
Please leave the comments below my video, and if you have a question based on my explanation,
I welcome all your questions as well. I do try to reply to your questions within two working days
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If you want to learn even more, visit my website: AboutRetirement.com.au
that is devoted to the topic of retirement, investing, Age Pension and all the issues in between.
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Now my recommendations to continue learning:
watch previously mentioned "Can I access my super and continue working?"
lots of people could benefit from this little gem strategy.
The second video is mentioned before important issue
of understanding investments risk, investment strategy
and what to do if things go wrong: "Investment risk in super".
I will be speaking with you in my next video, bye.