Anne Fuchs: Hello and welcome to Super Insider, where we chat about what you need to know to make the most of your super. I’m Anne Fuchs, the Executive General Manager of Advice, Guidance, and Education at Australian Retirement Trust.
This is a reminder that what we discuss today is general advice only, so you’ll need to decide if it’s right for you.
Today, we’ve got another instalment of our Q&A series, where the team answers some of our most frequently asked questions about everything that has to do with super. On the show today, we’re talking about getting ready to retire. I’ve asked Ruth Weaver and Adele Fisk from our Member Education and Advice teams to come into the studio and answer some of the questions about retirement that our members, listeners, and people in the wider community ask us the most. So, for now, I’ll hand it over to Ruth and Adele.
Ruth Weaver: Thanks for that, Anne. Welcome, everybody. My name is Ruth Weaver, and I’m part of the Education team here at Australian Retirement Trust. And I’m delighted to be joined by Adele Fisk, one of our qualified financial advisers. Today, we’ll talk you through some frequently asked questions that we hear quite a lot from people who are getting close to retirement and want to understand what they should be thinking about now.
We’ll start at the very beginning today, Adele, and we’ll start with helping our listeners understand when they can technically start thinking about retirement. Often, people assume there is such an age as retirement age, but it can be any age, can’t it?
Adele Fisk: That’s right, Ruth. I get a lot of people coming to me, and they ask when I am supposed to retire. What’s the age that I can retire? And with superannuation, there is no specific age. It’s when you’re ready to retire and can financially retire from the workforce.
I’m finding, Ruth, that many people I speak to are retiring later. They’re saying 62, maybe 65 when they’ll look at retiring. So, we’ve noticed that the age at which people want to retire is increasing, but that’s okay because it will positively impact longevity or how long the super will last into retirement. If they retire later, they’ll have more super.
Ruth: That’s right, and it’s also important to remember that the Age Pension age is 67. However, access to superannuation can be as low as 60. And often for people, retirement age might sit somewhere between those ages.
Adele: Yes. Although the Age Pension age is 67, retirement may occur before that. And there are lots of reasons why people retire. Sometimes, they’re just ready to leave the job; they want to retire and relax. Other times, it’s due to ill health, they’re unwell, and they must retire. Then, that’s when they finish with the workforce. Some people ease into retirement; they might work part-time and take their time going into retirement. Some people pull the pin and finish straight away. So, we hear so many different stories, and it’s essential to realise that there’s no one-size-fits-all when it comes to when to retirement.
Ruth: That’s right. There are lots of different ways. Going from full-time work to full-time retirement is far less common now.
Adele: Absolutely.
Ruth: A question often asked by members is, ‘When can I access super?’ We discussed that you may qualify for an Age Pension from the age of 67, but superannuation accessibility can happen before that age. This means you can consider accessing super when reaching the Preservation Age. So, what is the Preservation Age?
Adele: Many people wonder what this strange term ‘Preservation Age’ is because it’s antiquated. Preservation Age is the age at which you can access your superannuation. It starts at 60. The more people I speak to now are 60 or over and retiring.
I mentioned that reaching 60 and permanently retiring is a cashing condition or a condition of release in super. If people are born after 30 June 1964, their Preservation Age is 60. If they retire from the workforce, they can access their super. And 65 is another milestone age. When people hit 65, they don’t have to retire, Ruth. They can keep working and draw from super if need be.
Ruth: That’s right, and it’s worth reminding our listeners that even once you’ve reached Preservation Age, you are still working, and there are some ways that you can access some of your superannuation through what we call a Transition to Retirement. We have a great podcast for any of our listeners who would like to go back and listen to that episode.
A common question that people ask is how much I need for retirement. What’s the magic number to get to? And the reality is there is no perfect balance in your superannuation. What somebody needs for retirement will depend on many personal factors. Things like how long you might be in retirement - obviously, the younger you retire, the more money you’ll need. Whether you’re retiring as a single person, and you know you’re responsible for funding everything or whether you’re able to join assets together with somebody else. Or your health, whether you have any health considerations for which you will need finances. Whether you’re entering retirement with debt. It’s far more common now to see people with debt or financial dependents. All these factors need to be considered. However, one of the most important factors is lifestyle. What exactly do you want to do? The lifestyle you want to live will be a big indicator of how much superannuation you’ll need. Where is a good starting point? We’re all human and want an idea or benchmark to work off. What advice would you give somebody on where to start with this process?
Adele: Absolutely; there are many factors to consider when heading towards retirement or even wanting to know how much is enough. One of the things we talk about is that you can go to the Association of Super Funds Australia (ASFA) website and look at some of their recommendations. They give an idea, for example, of a super balance for a couple or a single at retirement, what that could be if they were debt-free at retirement, and if they have their own primary place of residence, so they’re not renting. When people talk to me, some have made their budget, and some haven’t. Budget is a significant factor. The process is much smoother for people who have made their budget, particularly during the advice process. It means that you can feel confident you can afford retirement, leave your role at work, and be comfortable just living the lifestyle you want to.
There are also recommendation rates on the ASFA website, one of which is called the two-thirds rule. If we think about lifestyle, everyone’s lifestyle is different. For some people, if they’re on $120,000 a year pre-retirement, they will need more than someone who lives on a lot less than that. The two-thirds rule talks about having at least two-thirds of your pre-retirement income in the retirement phase, paying off all your debts, like your mortgage, etc.
Ruth: Yes, that’s a great point. We don’t see people entering retirement with increased income needs compared to what they would have had, as they’re paying a mortgage, taxes, and maybe supporting dependents. There will be a dip in what’s needed during those retirement years.
It’s worth reminding people that funding retirement, there are lots of different ways you can start to get your hands on your superannuation. And there’s no right or wrong way either. It can depend on your preferences. And I preface this by saying you don’t have to touch your superannuation when you retire; you might have a spouse at home working. You might have assets generating enough income for the moment, and you need to leave your superannuation alone to let it accumulate returns until you’re ready to start accessing it.
Once you are ready to start accessing it, there are many ways. A common method is through what we call an Income account - where you’re moving your money from an accumulation stage of superannuation into a stage where you’re drawing the money down. The beauty of Income accounts is that they look and feel like the superannuation account you’ve become familiar with. You often have access to the same investment opportunities.
The difference with an Income account is that money is coming out of it, and you can determine with the super fund how often you’d like to get paid and how much to get paid. People can structure it very differently, can’t they? Sometimes, they access it directly through super or prefer to put some into Income accounts. What do you see when you’re talking to individuals about their preferences? How does someone decide which way to structure the superannuation so they can get it into their wallets and start enjoying it?
Adele: I speak to many people in different situations, but it’s all about income requirements. Retirement Income accounts are a special pool of money that you put your money into. There are rules within that environment; for example, there’s the $1.9 million transfer balance cap - people can’t transfer more than that into their Retirement Income account, so that’s a consideration. Do they need the income? Do they have other assets outside? That’s why getting a financial adviser to look at that is important. There are also lump sum withdrawals from my Accumulation account to consider. Or should I start up a Retirement Income account? It can be quite a tough decision, but we talk about it daily, which is useful.
Ruth: People can also be put at ease because if you decide to move your superannuation or some of your superannuation into an Income account, it doesn’t have to be for life. If, for any reason, your situation changes and you no longer need that income, you can reverse it back into your superannuation account. You can change what you’re drawing down from it, so it’s very flexible.
Adele, we might touch on one of the key benefits of holding your money in an Income account. What generally draws people into that product?
Adele: The Retirement Income account is what we call a tax-free environment. When people reach their preservation age and want to draw down on their super and need the funds, there’s no tax on earnings, which is a big kicker for them regarding how long it will last. With that zero-tax environment, the ATO does not tax the investment option. That is a big benefit of leaving money in that environment. They might draw a bit from their super and the Age Pension; nothing is set in stone.
Ruth, one thing to remember with Transition to Retirement accounts is that they’re taxed at 15% on earnings. So, they’re different from the Retirement Income account. If people are in that Transition to Retirement account, they will still be taxed on their investment earnings. There’s lots of flexibility and ways that their funds can last as long as possible.
Ruth: It’s also a good point to remind people that when it comes to retirement, you may have various sources of income. Superannuation for some people might be the only source, or it might not be an essential source of income. Many households across Australia in retirement are probably drawing income from different channels. So, a blend of some money coming through the Income account connected to their superannuation, some or all the Age Pension, and maybe even a small amount of income from an asset outside of superannuation. So, retirement income can come from various channels. Still, with Age Pension, that’s the one that we find people getting close to retirement are very mindful of around when they can access Age Pension; what are some of the rules I should be aware of when it’s time for me to knock on Centrelink’s door and see whether I’m going to qualify for any of this or not.
Adele: To be eligible for the Age Pension, you must reach a certain age. For people born after 1 January 1957, that age is 67. At 67, they can knock on Centrelink’s door and go through the application process to apply for the pension. In terms of rules, there are a couple to consider. Firstly, there’s a test. The test is either an income or an assets test, and people are tested under both for Centrelink purposes.
Income might include any other income earned or investment income. Assets are everything outside of the family home. Any other asset outside the family home, including super, is assessable under the assets test. Generally, what happens is the test that gives you the lower amount of Age Pension, which is the test you will be assessed for under Centrelink. People are assessed differently depending on their circumstances. Centrelink assesses singles and couples separately, as well as homeowners and non-homeowners separately. Depending on their situation, they will have different assessments under the assets test and income tests.
Ruth: Yes, that’s why they do both the assets and the income tests. To put it bluntly, the worst result is what you get assessed on. It’s worth being aware of that, particularly before talking to Centrelink. There’s lots of information on the ATO and Services Australia websites about those thresholds, what you can earn, and what you can have in assets.
It’s also important for people to know that even if you don’t qualify for the full Age Pension, you may still get some of it. Many Australians are not on full age pensions but are enjoying part pensions. You may qualify for the full Age Pension later as you spend your money during retirement.
When it comes to the source of income that would come from superannuation if we thought about an individual who would like that regular flow through an Income account, could you give people a visual of how that works? It’s simpler than you might think. In fact, you’re moving some, or all, of your money out of your Accumulation account into an account that looks and feels so much like the Accumulation account you’ve had. It’s common for people to have both accounts. You can leave some in superannuation, move some into the pension or Retirement Income accounts, and decide how much you’d like to draw annually.
Depending on what super fund you’re with, they usually give you a lot of flexibility here. They might say you can draw down fortnightly, monthly, quarterly, or even biannually or annually, depending on how you want to draw down.
Some key features to be mindful of with this product are that you need to draw down a minimum amount but not a maximum amount. Adele, what would that mean?
Adele: That’s exactly right, Ruth. With the Retirement Income account, there are minimum pension factors for each age group. They generally range in 10-year periods of age. For people under 65, their minimum pension factor would be 4%.
For example, a person rolls $100,000 into a retirement Income account. The minimum is assessed on 1 July each financial year, and for that person—under age 65—it would be $4,000. It doesn’t have to be taken in one hit. It can be taken, as you said, over 26 fortnights or 12 months, depending on their lifestyle, their budget, and what suits them.
But of course, if they’re in the actual Retirement Income account, they can take more than the minimum. There’s no maximum amount. They can draw down whatever suits their budget and lifestyle to achieve the annual income they’ve discussed with us.
Ruth: That’s a great point that you’re not restricted to what you can pull from this product. If it’s getting close to Christmas, or you’ve got a trip coming up, you’re also able to draw a lump sum out of the product. You’re not restricted to a regular flow of income. You can do that for whatever reason if you need extra cash in the bank account.
Let’s talk about tax in retirement. It’s good news for many people, particularly when you hold much of your superannuation wealth and plan on moving that into an Income account. It’s not an exaggeration to say your funds might be sitting in a tax-free haven.
Adele: That’s right, Ruth. When people leave their funds in the superannuation environment and drawdown, they’re in a tax-free environment if they’re in a Retirement Income account. However, people often need clarification on one important factor: money coming out to their bank account is tax free. If they’re over 60, and they meet a condition of release, the money comes out of their account tax-free to bank accounts, no matter whether it’s drawn from an Accumulation or Retirement Income account. It’s just that consideration of the 15% earnings tax in the Accumulation account versus the zero-tax environment of the Retirement Income account.
Ruth: There’s an interesting exception; I don’t know if an exception is the right word, but an extra ability for people to contribute money into superannuation through the downsizing rule. The downsizing rule is whereby someone getting close to retirement might decide to downsize their principal place of residence, and by doing that, there are rules around how long you’ve had to live in the property, etc. The motivation is to give people an extra opportunity to build up that superannuation balance. Is this something that pops up during your advice appointments?
Adele: Ruth, it absolutely does. We’re getting more and more calls around the downsizer contribution. It’s a rule recently introduced where people over 55 who sell their primary residence can put up to $300,000 into their super as a separate standalone contribution. It doesn’t count towards any of the other caps. However, people must consider things like Centrelink implications if they’re on benefits. Think about the caps in place, like the transfer balance cap. There are considerations where it would be worthwhile speaking to a financial adviser to ensure they’re not harming themselves. There’s no lifetime limit. People who may be going into Aged Care in their 80s and selling their homes can still put money into the super environment. That positively impacts their super’s longevity, peace of mind and financial outcomes.
Ruth: Thanks, Adele. I love the value, the peace of mind, and the opportunity to get that asset because up until now, we would often find that money sitting in a bank account and not getting as much benefit from it as we could in an environment like superannuation.
Now, I hate to be a dampener in the conversation. Still, we will have to turn to a more morbid element of superannuation. The reality is we’re all eventually going to pass away. And, if we haven’t been able to time it perfectly, which, let’s be honest, none of us will, at least for a lot of us, be some superannuation still left by the time we pass away. If you’ve passed away and there’s money in your superannuation account, or there’s money in the income stream account, that money will be passed on to your family, your dependents, for example. Is this a big part of your conversations through your advice? Do you advise clients on how to consider their dependents and how they’d like that money to be left behind in the event of their death?
Adele: We do talk about it at a high level. We tell them about the types of nominations they can have. An important thing that a lot of the people I speak to don’t know is that superannuation does not form part of your will or your estate. It’s a separate environment. It’s important to remember that. I’m not an estate planning expert, so I always say to speak to your estate planning specialist or solicitor to find out what’s right for you. There are 3 types of nominations. There’s a (1) non-binding, (2) a binding that’s binding to the board of trustees, and then for people that have income streams, there’s also a (3) reversionary beneficiary option.
The reversionary beneficiary option is if someone passes away, the pension or income stream reverts to their beneficiary. They have the option to leave it in that environment. The beneficiary can keep getting the payments and have that peace of mind that they’re still financially okay. That’s another option for people as they head into the retirement phase.
Ruth: I’ll do a shameless plug now and let our listeners know that we have a podcast episode on what happens to your superannuation in the event of your death. If you want to learn more about it, please listen to it.
Finally, before I get you to give your top tips for people 6 to 12 months out, an important consideration is around insurance. Many of us going through our superannuation accumulation stage might have life insurance or total permanent disability cover. Keep an eye on that. Depending on how you’ve structured it, it might be getting expensive. As you’re getting close to retirement, you might have gotten to a point where, because you can access superannuation, you’ll reassess whether you still need that insurance. It is an important thing to think about. The last point I have is to seek advice from a financial planner. Given that you’re a financial planner and have these conversations daily, what tips would you give someone not far off retirement and looking forward to it?
Adele: There are so many things people can do. Be an active participant in your retirement. Please don’t leave it to the last minute. Planning is key. An essential thing is thinking of your budget; that’s a critical point. Knowing what you’ll spend makes you feel confident and comfortable going into retirement. Consider things you want to include in your budget, like travel that will make your lifestyle pleasurable. You’ll be living the lifestyle that you dreamed of in retirement. Having that budget in place is essential. And then all the other things you mentioned, such as insurance and reviewing your investments. You can get help from financial advisers who will do this for you and enjoy helping you plan the pathway to retirement. So, everything you mentioned, Ruth, and then ensuring you’re taking ownership of your retirement goals will make all the difference.
Ruth: Adele, it’s been an absolute pleasure. I could keep going for a lot longer, but unfortunately, we have come to time. We’ve covered lots of information for people. Thank you so much for joining me today, and hopefully, we’ll get you back again soon.
Adele: Thanks, everyone. Thanks, Ruth.
Ruth: Well, that’s all we have time for today. We have some more Q&A sessions coming up, so if you have questions, we’d love to answer them. Please send us an email at podcast@art.com.au.
Thank you so much for listening to Super Insider. We hope you can join us again next time.
This transcript has been edited for length and clarity.
