If 2019 brings plans to retire, it’s time to view your super through fresh eyes
After decades of growing your super, it can call for a very different mindset to start drawing down the money in retirement. But thinking about how to make the most of your nest egg is critical to this new life stage.
Lump sum or pension?
Retirement brings two main choices about how you use your super – withdraw the money as a lump sum or leave it in the super system.
It can be tempting to cash in a nest egg worth a few hundred thousand dollars, especially if you’re wearing significant debt – and one in five over-55s are still paying off a mortgage. If you have debt it’s best to get advice about how to handle that.
Taking your super as a lump sum means shifting the money out of a low-tax environment into one that may be fully taxed. The alternative is keeping your nest egg in the super environment by investing it in a private pension through the same fund. Your super savings will be drip-fed to you as regular payments much like a normal wage or salary, making budgeting easier while still letting you benefit from super’s tax concessions.
Moving from accumulation to pension phase
Making the transition from the accumulation phase into the drawdown (or pension) phase is simple enough. You need to fill out the appropriate form, which should be available on your fund’s website.
Kajanga Kulatunga, senior manager, investment research and advice capability at QInvest, which provides advice and education services to members of QSuper, says it can take seven to 10 working days to process your request. If you’re sweating on your super for cash, check the processing time with your fund. Kulatunga cautions that smaller super funds can take longer.
From here, the regular payments out of your super can be made direct to your bank account fortnightly, monthly, quarterly or annually. The real challenge is deciding how much you’d like to be paid.
In the pension phase, those under 65 are generally required to drawdown a minimum of 4% of their super annually – a figure that rises with age. Interestingly, a CSIRO study found most retirees stick close to the minimum allowable drawdown, with the likely outcome that many will pass away with substantial amounts of their nest egg unspent.
Rather than scrimping on lifestyle, Kulatunga advises taking a look at the income you’re likely to need in retirement, bearing in mind any age pension payments you may be entitled to.
If you’re concerned about exhausting your super at an early stage, the MoneySmart website has an online calculator that lets you play around with the numbers to see how long your super will last depending on how much you drawdown each year.
You’ll get a better idea of your income needs as you settle into retirement, and happily, some flexibility is available. “While pension payments can be set, they can also be varied and partial withdrawals can be made,” says Kulatunga. He notes too that if you need extra cash in an emergency, some funds offer a special service to speed up claims.
Reviewing your current fund
The shift from accumulation to the drawdown phase should also be a cue to review your super fund. A fund that served you well in the workforce may not be the best choice for retirement.
The first issue to address is fees. At the point of retirement, your super savings are at their peak, and even a small difference in fees can add up to a significant drain on your account balance over time.
Across the industry, the fees on $250,000 in a pension account average $2922 annually though it’s possible to pay much less.
Your choice of investment strategy plays a role too. Australians are living longer. “Your investment horizon in the drawdown phase may well be up to 30 years. Your investment strategy should reflect your goals and values and give you the highest probability of giving you the lifestyle you desire,” points out Kulatunga.
If your current fund doesn’t tick all the boxes in terms of competitive fees for the investment options you’re looking for, it can make sense to switch funds. Just be sure to look before you leap.
The hidden costs of switching
Bailing out of your old fund has the potential to trigger unwanted costs. Kulatunga warns that exit fees may be applicable to older-style super funds, though from July 1, 2019 exit fees on super funds will be banned altogether.
A less obvious but potentially more costly issue can be the buy/sell spread.
Put simply, the buy/sell spread is the difference between the cost per unit to buy into a super fund, and the sell price per unit when you pull money out of a fund. A buy/sell spread can also apply when switching between investment options within the same fund.
To understand how it works, let’s say Sue wants to move $50,000 of her super from a growth investment option to a conservative option. If the buy/sell spread is 0.10%, it will cost Sue $50 to make the switch, so she’ll end up with $49,950 in her account after the transaction is processed.
Not all super funds impose a buy/sell spread, but it’s definitely something to check before you start moving money around.
A handful of super funds encourage members to remain loyal to their fund in retirement through a variety of rewards.
Sunsuper pays a Retirement Bonus worth 0.30% of the account balance up to a maximum of $4800.
QSuper offers an uncapped “transfer bonus”. The way this works is that QSuper sets money aside to pay capital gains tax that may apply when investments are sold during the accumulation phase of super. In the pension phase however, all investment earnings, whether income or capital gains, are exempt from tax.
So when a member transfers money from their QSuper accumulation account to a QSuper income account, the money previously set aside for tax is returned as a transfer bonus.
It can be a very handy boost indeed – some members have received transfer bonuses of up to $42,996.
Industry fund BUSSQ pays a “retirement reward” to members who switch to a retirement pension account.
The reward is worth 0.5% of the opening balance of the pension account, but members who’ve been with BUSSQ for more than five years can have their reward boosted by an extra 20%. This loyalty bonus works in a similar way to QSuper’s transfer bonus in that it represents taxes set aside while your money was in the accumulation phase.
Making the most of your super in retirement can be easier with the benefit of professional advice.
Plenty of funds hold free pre-retirement seminars backed by free or low-cost advice relating to your nest egg. The Department of Human Services has a free financial information service including seminars, on how to use your super in retirement.
This report was sponsored by QSuper but was independently researched and written.