Lump sum or pension?

It’s the question that many pre-retirees and retirees discuss constantly. But there’s no definitive answer. Choosing whether to take your super savings as a lump sum or pension depends on your individual situation.

However, for retirees looking for the security of an income for a set period of time, with the opportunity for growth but the security of knowing your income won’t be impacted by poor investment market performance, an account-based pension with a protected income benefit can be a good choice.

Benefits of an account-based pension with protected income benefit

• Peace of mind: regular, reliable income stream that won’t decrease over the term. A Protected Income Lifetime pension is payable for the remainder of your life, no matter how long you live, no matter what the investment market performance. You also have access to part or all of your account balance at any time.
• Tax effective: earnings in account- based pensions are not subject to tax. You will not have to pay tax on your income from a pension after age 60. If you are aged 55-59, the taxable portion of your annuity will be taxed at your marginal tax rate, but some or all of this payable will receive a 15 per cent offset.
• Eliminate longevity risk: protect your income over the long term. Most Australians can expect to live a long time in retirement. Given current improvements in mortality, the average life expectancy for men aged 65 is now 87 years and for women aged 65 it is 90 years.¹ With a possible three decades in retirement, it can be hard to forecast whether or not your lump sum will last.
• Opportunity for growth: participate in market upside. An account-based pension with protected income payment allows you to choose a range of investment options so you can participate in market upside. A guaranteed pension means the provider is responsible for managing the money throughout your retirement. They select and manage the investments and dealing with the risk of negative investment earnings.
• Reversionary benefit: take care of your loved ones. There is an option for your Protected Income to continue to be paid to your spouse in the event of your death.

Drawbacks of account-based pensions with protected income benefit

• Additional costs: protected income benefits are an additional cost to your account-based pension. These costs vary based on term and the underlying investments you choose.
• If you do not opt for a ‘reversionary’ income stream, when you die, your spouse will have access to the account balance.

Benefits of a lump sum

• Ability to repay debt: taking a lump sum may allow you to repay debts (such as your mortgage) and start your retirement debt-free.
• Money for capital expenditures: lump sums can be used to undertake home renovations, purchase a new car or take a long-delayed overseas holiday.
• Dual options: taking a lump sum to pay for major expenditures means the remainder can be left invested in your super fund to grow, or be converted into an income stream.

Drawbacks of a lump sum

• Your decision is final – once money is removed from the super system it may not be possible to re-contribute.
• Superannuation and account-based pensions are concessionally taxed, and you may pay more tax on your investment if outside this system.

Useful links:

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Important information and disclaimer

Sources

¹ Australian Life Tables 2005-07 cited in Institute of Actuaries, Submission to Financial System Inquiry 2014, www.actuaries.asn.au

This article is intended to provide general information only and has been prepared by MLC Limited ABN 90 000 000 402 (AFSL number 230694) without taking into account any particular person’s objectives, financial situation or needs. Investors should, before acting on this information, consider the appropriateness of this information having regard to their personal objectives, financial situation or needs. We recommend investors obtain financial advice specific to their situation before making any financial investment or insurance decision.

Any advice in this communication is of a general nature only and has been prepared without taking into account your objectives, financial situation or needs. Before acting on any advice in this communication we recommend that you consider whether it is appropriate for your personal circumstances.  Any tax estimates are intended as a guide only and are based on our general understanding of taxation laws. They are not intended to be a substitute for specialised taxation advice or a complete assessment of your liabilities, obligations or claim entitlements that arise, or could arise, under taxation law, and we recommend you consult with a registered tax agent.

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