The Best Retirement Income Stream

The Best Retirement Income Stream

You are about to retire, and you want the best pension fund to get a good income stream. Or maybe you have been retired for a while and now want to improve your retirement fund? If this is you, let’s talk about it now.

First, we need to understand:

  1. What is a super pension fund?
  2. When can you start a pension fund?
  3. How do pension funds work?
  4. Can I contribute to a pension fund?
  5. What are the most important benefits of pension funds?
  6. What you can do to make them last as long as possible?

What is a pension fund?

Super Pension funds are created by transferring your superannuation savings from the accumulation account (that’s where all your employer or your personal contributions have been saved over the years) into the retirement income stream and one of the types of retirement income streams are pension. The most common type of the pension fund in Australia is an Account Based Pension otherwise known as and allocated pension.

When can you start a pension?

To start your pension income stream, you need to meet your preservation age which is the age between 55 to 60 depending on your date of birth. You also need to meet so called “conditions of release”.

The most common conditions of release are:

  • You have reached your preservation age and you retired
  • You have reached your preservation age and you start a transition-to-retirement income stream called TTR for short (I will prepare another video explain that type of income stream)
  • You have officially stopped working on or after the age of 60, even if you commence work, or start your own business later again,
  • You turn 65 years of age (even if you haven’t stopped working, so officially you haven’t retired)
  • You become permanently incapacitated or diagnosed with a terminal medical condition
  • You die

Obviously we don’t want to meet the last two conditions, but as long as you meet any of them, you are finally in a position to enjoy your superannuation savings, either by transferring them to an income stream (such as a pension fund) or make capital withdrawals.

How does a pension fund work?

If you have met all the requirements and now you are ready to start your pension, first you need to decide what company and what account you want to keep pension fund in, as well as establish the investment portfolio for your fund.

A Important information to take into account is that our government introduced a limit of how much can be transferred to a pension fund, so please stick to those limits, otherwise your fund will be subject to a very hefty penalty. The limit is $1.6mil. If you have more – please contact me directly to discuss, as the situation is more complex and requires personal tax, income and retirement planning.

Once your savings are in the pension account, you need to draw at least a minimum payment which is determined by your age.

  • if you are below the age of 65 you need to draw 4% of the account balance (this is calculated on 1st of July each financial year)
  • if you are 65 to 74 it rises to 5% and keeps rising with your age.

For financial years 2019 – 20 and 2020-21 we have special rules due to Covid market crash.

How can I contribute to a pension fund?

No, you cannot, pension fund only accepts superannuation money as a rollover from your super fund. So if you want to have more money in a pension account, first you need to be eligible to contribute to superannuation, you have to know the limits and you have to decide whether to contribute money before or after you paid tax on it.

This is more complicated, so feel free to contact me to discuss personally, because this can have impact on your tax, on the level of income you can derive from your savings and longevity of that income and of course how much Age Pension you might receive.

As you can see, there is lots to consider before you start your pension. Pensions are not the only type of the retirement income stream and it is beneficial to understand them all to know if you should mix them and what strategy will provide you with the greatest income certainty and asset security for life.

What are the benefits of pension funds?

The biggest benefit is that Pension funds and all retirement income streams that start with superannuation money are TAX FREE for you (apart from the TTR that is under different rules).

So imagine investing a $1mil into a pension (this is not a recommendation, just a general example) imaging investing $1mil into this tax free pension environment and drawing 4% or 5% income , which is $40K or $50K of income and having to pay tax on that income – $5,347 on $40K – leaving you with only $34,653 and $8,797 leaving you with net income of $41,203

Compare that with the same level of income earned from employment or earned from a Term Deposit from your bank – not that you can find any term deposit paying you that sort of return any more.

Other benefits of pension funds:

  • You can create a regular income stream and you can decide how often you want the income to be paid to you – monthly, quarterly, half-yearly or annually.
  • Pension funds are a very long-term income account, but they are designed to last your life-expectancy, not your lifetime and are not guaranteed.
  • How long they will last, depends on your starting balance, the level of income your draw each year, any additional withdrawals you might be making along the way, actual performance of your fund and ongoing fees payable.

All those details need to be taken into consideration when you are preparing yourself for that retirement. And this is why I think a full check-up by a specialist in that area is of such great benefit for all retirees. 

Please be smart with your money, take advantage of all benefits available to you, create a long-lasting, secure retirement for yourself and your family and feel free to reach out if you have any questions.

by:  Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement

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