Account based pension or annuity – which income stream is for you
Today we will have a debate about the two income streams: account-based pensions and annuities, to decide which one is better and why, and which one you should consider.
We will compare them and discuss the following:
- What assets can be used to commence each income stream
- Income longevity
- Income
- Capital security
- Growth potential
- Centrelink treatment
- Estate planning
To make it a bit of a fun and a bit of a battlefield, let’s agree that Shaun will represent one type of an income stream – account-based pension, and I (Katherine) will be representing annuities.
Key Comparisons Between Account-Based Pensions and Annuities
1. Assets Used to Start the Income Stream
- Account-Based Pension: Requires superannuation funds. Flexible contributions can be made to super before converting to a pension.
- Annuities: Can be purchased using either superannuation or private funds, making them accessible to individuals who may not have super.
2. Income Longevity
- Account-Based Pension: Longevity depends on your withdrawal rate, investment performance, and account balance. There’s no guarantee your funds will last a lifetime.
- Annuities: Offer guaranteed income for life or a fixed term, even if the balance is depleted. With a reversionary beneficiary, your partner can continue receiving payments after your passing.
3. Income Flexibility
- Account-Based Pension: Highly flexible. You can adjust payments, choose frequencies, and withdraw above the minimum if needed.
- Annuities: Fixed income with limited flexibility. While predictable, changes cannot be made once the annuity is established.
4. Capital Security
- Account-Based Pension: No guarantees. Investments fluctuate with market conditions, and poor performance could reduce your balance.
- Annuities: Often provide a degree of capital security, especially for fixed-term annuities. However, early withdrawals usually mean forfeiting the annuity.
5. Growth Potential
- Account-Based Pension: Retains growth potential as funds remain invested in the market. While risky, this can help outpace inflation.
- Annuities: Typically prioritize income stability over growth, although some newer products offer limited exposure to growth assets.
6. Centrelink Treatment
- Account-Based Pension: Treated as an asset under the Centrelink asset test, with income deemed rather than directly assessed.
- Annuities: Lifetime annuities enjoy favorable treatment, with 40% of the balance and income excluded from asset and income tests, potentially boosting Age Pension eligibility.
7. Estate Planning
- Account-Based Pension: Allows reversionary beneficiary nominations or lump-sum payouts to beneficiaries. The remaining balance at death is passed to your estate.
- Annuities: Payments may continue for a spouse or beneficiary. However, the balance diminishes over time, as the annuitant receives income.
Expert Opinion: What Retirement Income Is Better?
When it comes to choosing the best retirement income stream, there’s no universal answer—it depends entirely on individual circumstances. Here’s what Shaun Jones, an experienced financial planner, has to say:
“It’s about finding the right balance for a retiree’s lifestyle and goals.”
Retirement income decisions hinge on several factors:
- Personal Circumstances: Each retiree’s situation is unique. Preferences such as access to capital, risk tolerance, and the desire for income certainty all play a role in determining the right solution.
- No One-Size-Fits-All Approach: A full discussion of available options is critical. While some retirees value control and flexibility, others prioritize predictable income or market exposure.
- Complementary Solutions: Combining account-based pensions and annuities can often provide the best of both worlds. For instance, an account-based pension offers growth potential and flexibility, while an annuity ensures income longevity and security. Together, these can complement each other to meet diverse needs.
- Maximizing Age Pension: A strategic blend of income streams can also enhance eligibility for Age Pension benefits, adding a significant financial advantage.
Ultimately, the goal is to align income streams with lifestyle goals and financial priorities, ensuring retirees enjoy the peace of mind they deserve in their golden years.
For a tailored retirement plan, it’s essential to consult with a financial expert who can evaluate your needs and craft the right balance of income options.
By: Katherine Isbrandt CFP® and Shaun Jones FP
Money Strategist & Retirement Planner
Principal of About Retirement
