Retirement Income Streams

What are retirement income streams?
When we retire we all have a common issue – how are we going to produce an income for the rest of our lives? The main thing we lose in retirement is the ability to earn wages and salaries.
Whether you’ve built up savings from superannuation, investment property, equity in your home, money in the bank, inheritance etc., you will need to turn this capital into an income stream which is convenient, secure and tax effective.
You may also have other objectives in retirement such as gaining the most out of Centrelink and the Age Pension or the Veterans’ Affairs Pension, in addition to estate planning issues.
For an ever-increasing number of people the answer lies in the form of income streams and, in particular, superannuation allocated pensions, term allocated pensions and other complying annuities.

Where do you go to get one?
Most life insurance companies and financial services organisations provide these different types of income stream products. You can approach these organisations directly, at which point they will usually direct you to one of their financial planning groups, or you can seek the advice of an independent financial planner. You should always seek professional advice. It is very dangerous to attempt to set yourself up with an income stream without professional consultation, particularly professional tax advice.

How do you set one up?
1. Decide on your retirement date or year.
2. Ensure you have a clear and defined set of goals and objectives.
(e.g. required income per year, investment objectives, access to capital, Centrelink etc).
3. Do your research! Most providers’ websites have additional information on their income streams.
4. Arrange an interview with a retirement specialist, preferably an independent one.
5. Work together to use your retirement savings to the best effect.
Remember, you do not need to review all possible income stream products in order to choose the one best suited to your circumstances. Pre-qualify your needs by checking the table [here] for those points which do or do not relate to your priorities.
Richard Sheargold

Table supplied by Louise Biti, Asteron.

For more information on Retirement Income from the FACS website,
click here

InvestSMART, a discount broker of allocated pension investments, have provided the following table which shows a number of the top performing funds based on 12 month’s performance.

If you wish to look at any of the funds in the table below you will be taken to InvestSMART’s website where you can research these products more, compare it with other investment options and most importantly request or download a Product Disclosure Statement (PDS).

Top Performing Retirement Funds

Managed Fund data is supplied by Morningstar Research and Standard & Poor’s Information Services and is subject to the following disclaimer.
Managed fund unit prices are indicative only.

Sourcing and comparing fixed term or Life Annuity style products from Life Insurance companies is not available online. Please call InvestSMART on 1300 880 160 for some comparable rates based on your timeframe. There is little doubt that by choosing wisely, a good retirement income stream will contribute to the basis for a comfortable lifestyle in retirement.

IMPORTANT DISCLAIMER : This information has been prepared for distribution over the internet and without taking into account the investment objectives, financial situation and particular needs of any particular person. Neither InvestSMART Financial Services Pty Ltd nor www.aboutseniors.com.au make any recommendations as to the merits of any investment opportunity referred to on www.aboutseniors.com.au or any related websites. All indications of performance returns are historical and can not be relied upon as an indicator for future performance.

© 2007 Morningstar Research Pty Ltd. All rights reserved. To the extent that the above constitutes general advice by Morningstar, this advice has been prepared by Morningstar Research Pty Ltd ABN: 83 062 096 342, AFSL: 243 161 and does not take account of your objectives, financial situation or needs. Before acting on any advice, you should consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. Please refer to Morningstar’s Financial Service Guide (FSG) for more information at www.morningstar.com.au/fsg.asp and consider the product disclosure statement before making a decision to acquire the financial product.

Changes to salary sacrificing rules

Last week, we advised About Seniors subscriber, Sue, of the new limits to salary sacrificing but she was concerned about how the Government would assses her gross income.

Q. Sue
If I make salary sacrifice contributions will the Government take that amount ‘off’ my gross income e.g. If I salary sacrifice $500 per fortnight that would bring my gross income down to $2000 per fortnight (before tax) which would bring us under the limit and my husband could retain his part pension. I am not sure if the Government will continue to let me do that?

A. Provided by Hank Jongen, General Manager, Centrelink
Currently, rules apply which mean salary sacrifices into superannuation if you are below Age Pension age are not counted under the income test. From 1 July 2009, if you are under Age Pension age, any income that you salary sacrifice into superannuation will be counted as gross income under the income test. This may impact on you or your partner’s eligibility for Centrelink payments.

The Financial Information Service can explain how the changes to Age Pension and earnings announced in the 2009/2010 Budget will affect you and your partner’s particular circumstances.

For more information or to make an appointment to speak with a Financial Information Services Officer, call Centrelink on 13 2300.

Keep super safe

The share market may be in turmoil and superannuation balances are dwindling but there are ways to minimise the damage.

The first thing to do is not panic, making rash financial decisions may only compound the issue. You should also be aware of your selected investment strategy – safe, aggressive or a balance of both. If you are exposed to more risk, you may wish to consider a more balanced approach. Consult an independent financial advisor and work out what is the best course of action for your individual situation. You can find details of accredited independent financial advisors by contacting the Financial Planning Association.

If you are about to start a pension, you may wish to consider a cash buffer in your pension. This may help see you through market volatility, such as we are currently experiencing, without having to draw on investments.

For those already living on pension income, you may actually be drawing down on capital; given that super pensions are currently being paid on 30 June 2007 balances. Depending on life expectancy and account balance, this could become a problem. Again, you should seek independent financial advice if you are worried about your pension arrangements.

For more information, contact the Financial Planning Association.

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Redundancy offers

It is important to consider redundancy offers carefully, Dixon Advisory’s John Bloggs, advised. Stress levels over job security remain high as uncertain economic conditions and rumours of further job losses continue.

Facing a redundancy earlier this decade was easier to manage as the chance of quickly finding a new job was high. However, with job vacancies at their lowest levels since 1975, employees should get advice as early as possible if they think a redundancy may be heading their way.

Large corporations and Government departments will often aim to make reductions to staff numbers through a programme of voluntary redundancies. These programmes allow employees to elect to leave and are seen as having a lower impact on staff morale compared to involuntary redundancy or retrenchment.

When an employee is made redundant, either voluntarily or involuntarily, legislation mandates the financial compensation that must be paid by the employer. The formal redundancy payment is generally made up of a payment in lieu of notice and a lump sum tied to years of service and salary. All outstanding Annual and Long Service leave entitlements should also be paid to the employee. Various options will apply to superannuation money depending on the type of fund to which the employee has been contributing.

Most people facing a redundancy are very concerned about what they should do with their severance payment and superannuation. While a lump sum payment can fund a change of career for some, many people need to rely on the severance payment as their only means of support until new employment is found.

While the changes to superannuation in the 2006 Budget were heralded to simplify superannuation, the tax rates applied to redundancy payments were also caught up in the reforms. In the minefield of loopholes that is superannuation legislation not all redundancy payments are treated equally.

Different rules apply to severance payments depending on the date the workplace agreement or employment legislation was written. This is one of the key reasons why it is so important to get advice. Anyone in this situation, or with family members facing redundancy, should seek independent advice as early as possible from a qualified and experienced advisor.

Many private and public sector employers will subsidise the cost of an appointment with Dixon Advisory to help employees facing redundancies make fully informed decisions regarding their financial future. For more information please contact Dixon Advisory on 1300 883 158 or email

Pension dilemma

Leith, an AboutSeniors subscriber, is confronted with the same dilemma that many older Australians are facing; how will they cope when they stop working?

Q. Leith
I hope you can give me advise on my financial problem, I am a 66-year-old (now single) female still working full-time. I had planned to retire at the end of 2010 or early 2011 when my next Long Service Leave is due, however I only have $60,000 in super, I will be eligible also for the full Pension Bonus Scheme which will be around $34,000. I have a mortgage of $120,000 on a townhouse worth $300,000 and have no other assets except an old car and usual household items.
I cannot see how I am going to manage on a pension and do not know whether I should pay a lump sum off my mortgage on retirement or keep paying my regular monthly payments (which are $700) until my funds run out and then what do I do?
Your reply will be greatly appreciated.

A. Provided by Darren Howard, Executive Financial Advisor, Dixon Advisory
I would suggest you need to lower your debt with Pension Bonus Scheme money. If the pension will not support your lifestyle expenses, other options are:
1) To work longer and build super up and/or
2) Sell home and clear debt. Deposit funds into your super
and use these funds to supplement pension. You should
find renting will allow for better standard of living, and
will improve cash flow.

There is no benefit to retaining debt, as this is just a dead weight interest cost. Also while continuing to work on, if you encounter the possibility of a redundancy you should consider taking it, as it will lead to more concessional tax treatment of leave entitlements, which can be used to further reduce debt attached to principal place of residence.

Tax-free allocated pension

A new product, which integrates a superannuation pension with a cash management account, will allow you to get direct access to your pension fund through a bank branch, ATM or online banking, and could save you paying tax.

ING and ANZ have combined to offer an ING pension product with an ANZ Cash management account, meaning you can manage your retirement savings in a single integrated product.

This is a first for the industry and means that you no longer need to keep your cash reserves in a separate, non-super account, with any interest earned subject to tax. In addition, it‘s always handy to have immediate access to cash if you need to cover unexpected costs. This new arrangement provides much flexibility in terms of where you choose to invest your hard-earned dollars. To find out more, click here

Stamp duty exemptions

The amount of stamp duty that needs to be paid when moving to a smaller home or retirement village later in life can often be a barrier to achieving your goal of a contented retirement.
Stamp duty exemptions are granted to first homebuyers and a Parliamentary Inquiry into housing affordability has provided evidence to support the same exemptions being granted to those downsizing from their primary residence. With the Inquiry finding that not only do older Australians still have debt as they reach retirement age, but that the level owed had increased, with mortgage holders owing more than $50,000 increasing to 61% and those owing more than $100,000 has risen massively from 12% to 38%.

With the Inquiry acknowledging that suitable housing is a major factor in the health and wellbeing of older Australians, making it easier for people to choose the right living option for them, and then being able to afford it, is key to supporting an ageing population.
For more information on the Parliamentary Inquiry, visit the Australian Senate.

How much is enough to retire on?

Those starting to look at potential retirement income scenarios might like to start with a “how much will I need” online calculator.
Two we like are:

AMP
“My retirement simulator” How much super will you need? How long will your funds last?
https://onlineservices.amp.com.au/MyRetirementSimulation/showSimulator
BT Financial Group
Tools and resources – includes government co-contribution calculator
http://www.bt.com.au/investors/tools-and-resources/tools-and-resources.asp

The Centrelink website is a rich resource portal for those who believe social security will provide part of their income. In particular, the Financial Information Service is a great starting point
http://www.centrelink.gov.au/internet/internet.nsf/services/fis.htm
and the overview retirement planning page has links to an excellent retirement rates facts sheet
http://www.centrelink.gov.au/internet/internet.nsf/individuals/ret_index.htm

The National Information Centre on Retirement Investments (NICRI) is also government funded – and features an excellent “money map” utilising calculators to step you through ramifications of decisions to spend or save
http://moneymap.nicri.org.au/

Are you ready to retire quiz

Most Australians enjoy at least a little work in their life-work balance, but how much is enough – and have you done the planning that’s necessary before beginning your transition?

Use our quick 25-questions quiz to check the health of your retirement planning

The holistic approach is good not just for your health and wellbeing, but also when planning for your retirement.
You’re continually being told you need a secure retirement nest egg (say, $1 million). So you decide that, until you have this certain amount, you’re not ready to clock off. While there’s no doubt being financially secure is incredibly important, though, there’s much more to a happy and fulfilling later life than the money.
First and foremost is a sense of choice. Next is independence, with a readiness and willingness to move (rather than be pushed) to the next stage not far behind.
Research confirms that those who plan their transition into retirement are much more likely to create a satisfying life-balance. Sound financial planning is indeed an integral part of the process, but there’s much more to consider than just the dollars.

Take the quiz now!

Financial Planners and Accountants

The Financial Planning Association of Australia has an excellent “find a planner” tool on site allowing you to search by business name or suburb:
http://www.fpa.asn.au/FindaPlanner/

Find an accountant who is also a financial planner here
http://www.cpaaustralia.com.au/apps/finder/fp/showfind.aspx?CPSSessionID=SID-3F57FECA-E89DC129

Allocated annuity

Q. David
I want to cash in the remaining amount of my Allocated Annuity, how would that affect my pension?

A. Provided by Dante De Gori, Technical Manager - Business Support, ClearView Retirement Solutions & MBF Life Limited
The rule with Centrelink is that unless they are notified otherwise, any commutation (lump sum withdrawal) will be treated as additional income from their allocated annuity/pension and therefore affect the income test for the Age Pension.

If you notify Centrelink that it is a Lump Sum withdrawal then it will not be treated as income but rather the treatment will depending on what the client does with the money. For example if they place it into their bank account then the value of that bank account will be assessable under the assets test and then deemed under the income test.

Simpler retirement planning

For many people, retirement entails significant lifestyle and financial changes. Planning for it, however, can be a difficult and time-consuming process. To help you start, ClearView Retirement Solutions has created a range of free online financial tools.

These calculators help you understand how much you’ll need in retirement and to plan for the future in just a few minutes. Calculators range from a simple budget planner for determining your current cost of living, to a tool for estimating your superannuation entitlements at retirement.

Planning is an important part of good financial management. Taking steps to control your finances today could make a long-term difference to your savings and investments. But planning for retirement can seem daunting. These free online financial tools and calculators have been designed to assist you to better understand your present financial situation and plan for the future. In just a few minutes you could better understand your present financial situation and identify what to do next.

ClearView’s calculators include:

- Budget planner – This simple tool is useful for determining your current cost of living while helping you decide how much you can save.

- Income in retirement calculator – This tool helps you to estimate your income requirements during retirement. As a rough guide, you should target a retirement income of 50–70% of your pre-retirement salary. This is because many costs you would incur normally would no longer apply.

- Capital investment monitor – Want to know how much you’ll have to invest at retirement? This simple tool helps calculate your total wealth (such as superannuation payout, savings, and sales proceeds) less major expenditures such as renovations, motor vehicle purchases and overseas trips.

- Superannuation estimator – This calculator allows you to see how much your superannuation benefits may be worth at retirement and how much you could need to save to reach your desired level of income.

- Money longevity time line – This simple calculator provides a projection of how long your savings could last in retirement based upon your weekly income needs.

- Estate planner – A useful tool if you are near retirement. It helps you to determine how much money you can receive during retirement while providing for dependants or family.

- Salary sacrifice comparison – This calculator enables you to compare the difference between salary sacrifice versus post tax contributions into superannuation.

Taking steps to help control your finances today could make a long-term difference to your savings and investments. To start using the calculators, simply go to the ClearView website at www.clearview.com.au

Any advice in this material is general advice only and does not take into account your individual objectives, financial situation or needs. Before acting on it you should consider the appropriateness of it taking into account your personal circumstances.

More on Superannuation

Our Superannuation page has a lot more information.

ASIC’s Investments Test

The Australian Securities and Investments Commission (ASIC) has warned that many heavily advertised fixed interest investments should be thoroughly researched before consumers buy into them. ASIC’s three-point test can help you keep a cool head when the temptation of attractive returns is dangled before your eyes.

ASIC warns that many companies fail to disclose important information or make claims that are misleading. Asking the following three questions of any investment company could help clarify the true value of their offers and give you peace of mind.

Who are you giving your money to?
Banks, building societies, credit unions, super funds and life insurance companies are the only institutions specially regulated to make sure that, under all reasonable circumstances, they can meet their financial promises. Otherwise, you’re taking an extra risk, like buying shares. And, if property is involved, your investments are not automatically ‘as safe as houses’. You alone have to judge the risk that the company you lend to may fail or default.
Is the interest rate higher than 8.5% per year?
If your expected return seems high, it adds extra risk. Your proposed investment may be more risky than a typical fixed interest investment. You may risk losing a significant amount of what you’re planning to invest, so it’s vital to check if you’ve got all the facts and if you can handle those risks. These must be spelled out in the product disclosure statement or the prospectus which the fund must give you.
Do you plan to put all your eggs in this basket?
Placing all your funds in one investment is extremely risky unless you’re putting the money into a deposit with a bank, building society, credit union, super fund or life insurance company. If things go wrong, your entire nest egg could be wiped out. Unless you can afford to lose all your money, spread your risk by spreading your investments.

FIDO offers lots of financial tips and advice on their website.
Go there

Choosing a Retirement Income Product

As you approach retirement, you need to decide how to use the super you’ve saved to help support yourself in retirement. Super funds and life insurance companies offer various types of financial products that let you draw down your superannuation savings in an orderly way to suit your lifestyle. This exercise can prove very complicated, so ASIC are offering an excellent overview of the products, issues and decision-making process on their FIDO website.

Visit the website to see an overview discussion which walks you through the basics of retirement income, including getting an age pension, having money for emergencies, avoiding unnecessary tax, and much more.
Go there

Income Streams - Finding the Best Product

Retirement income stream products are many and varied. It can be very confusing understanding the differences between the different products. And this can be critical to maximizing your Centrelink benefits. The Fido website has five excellent fact sheets on retirement income streams to help you choose the best product for your specific situation.

Retirement income streams - Fact Sheets

The Fido website has produced five fact sheets, available online as well as a downloadable (PDF) comparison table to help explain the different features of the five main income stream offerings:

Allocated pensions and annuities
Market-linked pensions and annuities
Lifetime pensions and annuities
Life expectancy pensions and annuities
Fixed term pensions and annuities

The products are compared across the following points:

What income do you receive?
Can you withdraw? How long do payments last?
Can you choose how the money is invested?
Is this a complying income stream?
What happens if you die?

Go there

Department of Family and Community Services

FaCS and the National Information Centre on Retirement Investments, Inc. (NICRI) have jointly written "Investing Money - Your Choices" to help you understand your options so you can get the best from your savings and investments both before and after you retire.
Go there

Complaints

If you need help to make a complaint about a financial institution please check the @boutSeniors Dispute Resolution and Advocacy page.
Go there

Retirement Income Streams