Superannuation and retirement go hand in hand, presenting a host of decisions for Australians planning their future.
While many wonder what happens to their super once they retire, understanding your options is essential. From starting an income stream to making lump-sum withdrawals from your super, your choices can significantly impact your retirement.
Let’s break down what you need to know about managing your superannuation at retirement.
It’s important to note that super accumulation accounts at retirement differ from defined benefit schemes, often associated with government employees. This article focuses solely on ordinary super accumulation accounts at retirement.
What Happens to Your Super at Retirement?
There’s a lot of confusion around what happens to your superannuation in Australia once you retire. Should you tell your super fund you’re retired? Will you need to withdraw your super? Are you required to start an income stream?
Before we answer those questions, it’s important to first understand how the term retirement is defined for superannuation purposes.
Retirement, for superannuation purposes is defined as either:
- Being age 60 or over and retired – with no intention of ever working again on a full-time or part-time basis; or
- Having an employment arrangement end – after attaining age 60.
If either of these definitions are met, then you are said to have satisfied the definition of retirement for superannuation purposes.
So, assuming you’re retired, what happens to your super?
Once you have retired, nothing actually happens to your super. If you have not notified your super fund that you have retired, your super balance will simply remain invested in the accumulation account – the only difference being that your account will no longer be receiving employer contributions.
While nothing automatically changes with your super upon retirement, there is one important step you should do.
Superannuation and Retirement: What to Do?
Upon retirement, it’s essential to notify your super fund of your retirement date.
The reason for this is because your superannuation balance is classified as Preserved until retirement. This means withdrawals cannot be made from your super account. By notifying your super fund of your retirement, your super balance will convert from Preserved to Unrestricted Non-Preserved.
Even if you don’t plan on making any immediate withdrawals from your super account, you should still notify your super fund of your retirement as soon as possible.
If you have more than one super fund, you should notify each of them individually of your retirement.
Once you have notified your superannuation fund of your retirement you need to decide what to do with your super.
To learn more about when is the best time to retire retire, read our guide on how do you know when to retire.
3 Options For Your Super When You Retire
Once you retire, you have three main options available to you. You can:
- Use your super to start an income stream
- Leave your super in accumulation
- Withdraw your super as a lump sum
Let’s take a look at each of these options, including why you might choose one option over another and the pros and cons.
1. Use Your Super to Start an Income Stream
The most common course of action for someone to take at retirement is to use their superannuation to start an income stream, particularly an account based pension.
An account-based pension provides you with regular income payments, which can be used to cover your retirement expenses. You can also make ad-hoc lump sum withdrawals whenever you please. The balance in your account-based pension is invested, continuing to earn returns while providing you with a steady monthly income.
As an added benefit , once you commence an account-based pension, all investment earnings within the account are entirely tax-free.
While many retirees choose an account-based pension, there is also the option to use super to start a guaranteed annuity income stream. Although annuities offer certain benefits, they are less popular due to their lower flexibility compared to account-based pensions.
Since most retirees rely on their superannuation for regular income, starting an account-based pension is often a straightforward decision. However, once you begin, you must meet the minimum drawdown requirement each year.
So, if you don’t necessarily need this income to support you in retirement, you might consider leaving all or some of your super as is, in an accumulation account.
Learn more about the best income streams for retirement.
The second option is to leave you super in accumulation.
2. Leaving Your Super in Accumulation
Prior to retirement, your superannuation is invested in an accumulation account. When you retire, there is no obligation to move your super out of this account. You can keep your superannuation in an accumulation account indefinitely.
Your accumulation balance will continue to be invested according to your selected investment options, generating returns over time. Even without further contributions, the long-term investment returns should generally outweigh the associated fees.
Furthermore, even if you do choose to leave your super in an accumulation account, you are welcome to make as many withdrawals as you like and as much as you like, provided you have met the definition of retirement and notified your super fund of this.
The main drawback of leaving your super in an accumulation account, compared to starting a retirement income stream, is that the investment earnings will be taxed at up to 15%, whereas they are tax-free when you commence an account-based pension.
The third option is to withdraw your super as a lump sum.
3. Withdraw Your Super as a Lump Sum
Once you retire, you have full access to your super balance, allowing you to withdraw some or all of it as a lump sum. This can be useful if you need to pay off residual debt or make a significant purchase, such as a new caravan, car, or an overseas holiday.
However, there are a couple of important factors to consider before making any lump sum withdrawals.
First, the general strategy, and what we typically recommend for our clients, is to keep as much wealth as possible within the tax-efficient superannuation environment, particularly during pension phase, where all investment earnings are tax-free. Withdrawing a lump sum and holding the funds outside of super may reduce this tax efficiency.
Secondly, once you have made a withdrawal from super, you might have trouble getting the funds back into super later if you change your mind, due to contribution caps and contribution age limits.
Exploring your options with your superannuation at retirement allows you to understand the pros and cons of each choice. Whether you decide to start a pension, leave your funds in accumulation or withdraw everything, each option has distinct advantages and considerations that should ultimately be aligned with your retirement goals and objectives.
Now that you’re aware of your options, there are a few other aspects to consider when managing your super in retirement, such as your investment choices and potential Centrelink implications.
Should I Change My Investments at Retirement?
Upon retirement, you will no longer receive regular contributions to your super account, which has important implications for your investment strategy.
Without ongoing contributions, and with the likelihood of making regular withdrawals from your super, it may be wise to consider a more conservative investment approach as you enter the retirement phase for the following reasons:
- Reduced Volatility – While you were working, market volatility was less of a concern because you weren’t making withdrawals during downturns, and your regular contributions allowed you to purchase investments at lower prices. This dynamic supported your super balance whether markets were rising or falling. However, in retirement, regular withdrawals to cover expenses might force you to sell investments during market lows. Although a conservative investment strategy may yield lower long-term returns, it helps mitigate the impact of market fluctuations, reducing the risk that these peaks and troughs will erode your retirement savings.
- Greater Predictability – a more conservative portfolio has greater predictability of returns and less fluctuations. This makes the outcome of your retirement more certain and easier to plan. Because a more conservative portfolio is less likely to have significant drops in value and less frequent years of negative returns, the risk of needing to sell investments during unfavourable market conditions is minimised.
For these reasons, many retirees choose to reduce the risk in their portfolios by increasing their allocation to defensive assets (such as cash and fixed interest) and decreasing their exposure to growth assets (such as shares and property). This doesn’t necessarily mean eliminating growth assets entirely, but adjusting the balance to reflect a more cautious approach compared to your pre-retirement strategy.
Related article: Retirement Planning Strategies & Tips
How Does Superannuation Affect Centrelink Payments?
Another very important consideration regarding your super and retirement is its impact on your current or potential Centrelink entitlements.
The key rules to remember are:
- If you are 67 or older, your superannuation balance will be fully assessed under the Centrelink assets test and deemed under the income test.
- If you are under 67, your superannuation accumulation balance is entirely exempt from Centrelink assessment in all cases. However, if you start an income stream before turning 67, the entire balance of that income stream will be assessed for the Centrelink assets test and deemed for the income test.
Therefore, if you are under age 67 and commence an income stream, you should be mindful of how this may affect any DVA payments or disability support payments received by you or your spouse, or any Age Pension payments being received by your spouse.
With all of these considerations and decisions to make with your super at retirement, what should you do?
What Should You Do With Your Super at Retirement?
Most of the retirees we work with typically use their super accumulation balance to start an income stream and make lump sum withdrawals to cover any on-off expenses. Many also switch to a more conservative investment option for a more predictable retirement outcome.
Your age, relationship status, assets inside and outside of super, and retirement income needs will all influence the best course of action for your super.
Starting an income stream offers the advantage of regular, tax-free income to cover retirement expenses, along with tax-free investment earnings on your account balance. The downside is that you are required to withdraw at least the minimum pension amount each year, and the balance is assessed for Centrelink purposes even if you’re under 67.
On the other hand, keeping your funds in the accumulation phase means the balance isn’t assessed for Centrelink if you’re under 67, and there’s no obligation to make withdrawals each year unless you need to. However, withdrawals aren’t typically automated or regular, and investment earnings within the account are subject to tax.
Ultimately, there’s no single right or wrong approach to managing your super at retirement – It’s about weighing the benefits and considerations of each option based on your personal circumstances and goals.
Need help with your super at retirement?
At Toro Wealth, we specialise solely in retirement planning advice. Our aim is to give you confidence around when you can retire, the retirement income you can achieve and how to optimise your financial position in the lead-up to retirement. If you’re interested in learning more about our service and cost, click here.
