Introduction
Retirement income streams are a crucial aspect of financial planning, providing retirees with a steady flow of income. The Australian Government offers concessional tax treatment on these income streams, making them an attractive option for those transitioning into retirement. There are several types of retirement income streams, each with distinct features, eligibility criteria, and tax implications.
Types of Retirement Income Streams
1. Market-Linked Income Streams (MLIS)
Market-linked income streams, also known as term-allocated pensions, were introduced for individuals seeking market-based returns with social security advantages. Although new MLIS products are no longer widely available, they may still be accessed through limited providers or self-managed super funds (SMSFs).
Key Features:
- Funded from superannuation proceeds only
- Annual payments must meet minimum requirements
- Designed to exhaust capital over the term of the pension
- Eligible for a 50% asset test exemption for social security purposes
- Cannot be transferred back to the accumulation phase
2. Lifetime Income Streams
Lifetime income streams provide guaranteed payments for the life of the retiree and, in some cases, their spouse. These income streams can be either immediate or deferred and have undergone regulatory changes to enhance flexibility.
Key Features:
- Payments continue for the retiree’s lifetime
- May include reversionary benefits for a spouse
- May be subject to social security means testing
- Tax concessions available for certain products
3. Fixed-Term Income Streams
Fixed-term income streams provide payments for a predetermined period rather than a lifetime.
Key Features:
- Can be purchased using superannuation or personal savings
- Payments set at commencement and cannot be changed
- May have social security advantages depending on eligibility
- Can include residual capital value (RCV), where a lump sum remains at the end of the term
4. Defined Benefit Income Streams
Defined benefit pensions are generally available to government employees and certain corporate superannuation schemes. These income streams guarantee a fixed pension amount for life.
Key Features:
- Payments based on salary and years of service
- Generally non-commutable
- Social security assessment depends on whether the scheme is taxed or untaxed
- May be subject to the defined benefit income cap
5. Account-Based Pensions (ABP)
Account-based pensions (allocated pensions) are the most common form of retirement income stream. They provide flexibility in accessing superannuation funds while benefiting from tax concessions.
Key Features:
- Can only be commenced with superannuation proceeds
- Flexible payment amounts above a minimum drawdown
- No maximum withdrawal limit (except for Transition to Retirement pensions)
- Earnings are tax-free once in the retirement phase
- Remaining balance can be left to beneficiaries or converted into another income stream
Taxation of Retirement Income Streams
Income from superannuation pensions is generally tax-free for individuals over 60. However, taxation may apply for those under 60 or for specific types of pensions, such as defined benefit schemes.
Additionally, account-based pensions are subject to a minimum drawdown percentage, which increases with age. A temporary reduction applied during COVID-19 but has since ceased as of the 2023-24 financial year.
Case Study: Choosing the Right Retirement Income Stream
Example – Comparing Options Helen, aged 65, has $800,000 in her superannuation account. She considers two options:
- Account-Based Pension (ABP): Offers flexibility with tax-free earnings and withdrawals. Helen must withdraw at least 5% per year.
- Lifetime Annuity: Provides guaranteed income for life but limits access to capital.
After consulting a financial adviser, Helen opts for an ABP, allowing her to withdraw funds as needed while keeping her investment flexible.
Final Thoughts
Choosing the right retirement income stream depends on individual circumstances, including financial goals, risk tolerance, and eligibility for social security benefits. Professional financial advice is essential to ensure an optimal retirement income strategy that maximises tax efficiency and long-term financial security.