There is an art to your retirement drawdown strategy that not only reduces your tax, but also increases the financial longevity of your retirement.
So, what’s the best plan of attack? What should your retirement drawdown plan be?
This article explores three retirement income drawdown strategies and the pros and cons of each, plus answers some common questions around drawing down on retirement funds.
Retirement Drawdown Strategy Options
Let’s consider this: You’ve got a superannuation balance and you’ve got some bank savings and maybe some managed funds or shares in your own name.
You’re now retired.
What do you do? Well, you have a few options. Do you:
A. Leave your superannuation in accumulation phase and use up all of your personal investments and bank savings first, then move on to your superannuation?;
B. Convert your superannuation into an income stream and drawdown as much as you need to cover retirement expenses, leaving your personal investments in place until required, if ever?; or
C. Convert your super into an income stream, take out only the minimum required income and then cover any cash flow shortfall with personal bank savings and investments.
I’d like to phone a friend Eddie…
Look, to be completely honest there’s a number of things to consider with each option, but we’re going to go through some of the pros and cons of each.
Ultimately, your personal circumstances will dictate which option is best – and it may be slightly different to any of these.
Retirement Income Drawdown Strategy – Option A
So, Let’s begin with Option (a) – leaving your super in accumulation phase and living off personal investments first.
This involves not touching your superannuation at all and simply covering all of your expenses by drawing down on your personal investments.
Here’s the Pros:
- Your super balance continues to accumulate in an account where earnings are taxed at a maximum of 15%;
- You’re reducing the investments in your personal name which can be beneficial in reducing taxable income over time;
- It’s a basic approach because you don’t really need to make any changes to your super. It just keeps on keeping-on until you run out of personal savings; and
- If you are under Age Pension age, the amount held in an accumulation account is not assessed for Centrelink purposes, which could be beneficial for you or your spouse.
But Here’s the Cons:
- By leaving your super in accumulation phase, Your super earnings continue to be taxed at up to 15%, which is higher than the 0% tax on earnings in an account based pension and could be higher than the tax-free threshold on earnings in your personal name;
- If you have a high taxable component within super and pass away, death benefits tax on your super could be payable. Whereas there is no specific death tax on personal investments;
- To cover retirement expenses with personal investments you may need to progressively sell down shares or managed funds, which could have CGT implications;
- If you use up all of your personal investments and bank savings, you will not have immediate access to funds; and
- There is more of a risk of overspending as you are not receiving a regular income stream each week or month.
Further Reading: What Should I Do With My Super at Retirement?
Retirement Income Drawdown Strategy – Option B
Let’s move on to Option (b) – using your super to start an income stream, drawing as much income required to cover expenses and preserving your personal assets.
This involves converting all of your superannuation into an income stream and nominating to receive regular monthly income payments that will completely cover all of your retirement expenses, so that any personal investments can simply continue to accumulate.
The pros of this are:
- Converting your super to a pension means that all earnings within the pension account, including capital gains, are tax free. This can save you around $3,000 each year on a $500,000 balance;
- You do not need to sell any investments in your personal name, ensuring no CGT is payable;
- You also receive a regular income stream, which can help ensure you are not overspending;
- The pension income is generally tax-free if you are over age 60;
- By not touching your personal cash and investments, you will always have immediate access to the funds if required – and not have to submit a request to your super fund for money; and
- It reduces potential death benefits tax if you were to pass away, because you are reducing your super balance each year
What about the cons of this strategy?:
- You must draw the minimum required pension income each year, regardless of whether you need that much, or not; or
- By drawing more than the minimum required amount from the pension account, you are not preserving as much as could be preserved in the tax-free pension phase – compared to if you only drew out the minimum required.and
- By not touching your personal assets, they are presumably increasing in value and therefore potentially increasing the taxable income generated from them and/or increasing potential CGT when they are eventually sold.
Further Reading: 7 Ways to Cover Expenses in Retirement
Retirement Income Drawdown Strategy – Option C
And finally, Option (c) – starting a super pension, nominating to receive only the minimum required pension income and then meeting any surplus income needs from your personal bank savings and investments.
This option involves using your total superannuation balance to commence an account-based pension and opting to receive the minimum required pension payments, which is calculated based on the pension factor associated with your age; then, covering any additional income needs (or capital expenses) by drawing down from your personal investments.
The pros include:
- All earnings within your pension account are tax-free, meaning you could be reducing super earnings tax by $3,000 per year for every $500,000 you have in super;
- You are preserving as much of your wealth as possible in tax-free pension phase by only drawing the minimum; and
- You slowly reduce your personal investments, minimising the potential CGT implications each year and reducing the taxable income generated from investments each year
The cons are that:
- It may be harder to track what you are actually spending, due part of your income needs coming from your super pension and part from personal investments.
Further Reading: 5 Biggest Retirement Planning Mistakes
There is no one answer for everyone.
When we work with our clients, we generally ensure they have an emergency cash buffer of anywhere between $20,000-$50,000 depending on what they are comfortable with and then try to preserve as much as possible in tax-free pension phase, so we’d probably lean more towards Option C. But, this really depends on your level of assets outside super and the likelihood of death benefits tax being an issue.
Our financial planning firm, Toro Wealth, specialises solely in helping 50 to 70 year-olds optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.
Frequently Asked Questions
Here are some frequently asked questions in relation to retirement drawdown strategies and the various ways to draw down on retirement funds.
What Is a Retirement Drawdown?
A retirement drawdown is an amount drawdown from your superannuation or pension retirement savings on a regular basis that is used to assist in covering your retirement expenses.
What Is the Minimum Super Drawdown?
The minimum super drawdown ranges between 4% and 14% of your account balance each financial year. This is known as the minimum pension factor. The pension factor that applies to you is based on your age at the commencement of your pension and each subsequent 1 July, as follows:
|Age||Standard Minimum Percentage Factor||Reduced Minimum Percentage Factor (2020 - 2023 FY inclusive)|
|Below Age 65||4%||2%|
|65 - 74||5%||2.50%|
|75 - 79||6%||3%|
|80 - 84||7%||3.50%|
|85 - 89||9%||4.50%|
|90 - 94||11%||5.50%|
|Age 95 and above||14%||7%|
What Are the Disadvantages of a Drawdown Pension?
The disadvantages of a drawdown pension are that you must drawdown at least the minimum required pension each financial year, which could mean that investment assets are being sold in poor economic conditions in order to satisfy minimum drawdown requirements. Additionally, by drawing down from your pension, you are reducing the amount of wealth held in tax-free pension phase, whereby all investment earnings within the account are received tax-free.
Do I Have to Drawdown on My Super When I Retire?
No, you do not have to drawdown on your super when you retire. Your superannuation can remain in accumulation phase indefinitely. However, there are a number of advantages, including tax concessions associated with converting your super into an income stream.
What Percentage Should I Drawdown From My Pension?
The percentage you should drawdown from your pension should be at least equal to the minimum pension factor associated with your age, which ranges from 4% to 14% each financial year. However, the actual percentage you should draw may be greater if this is your only source of income and your retirement expenses are greater than the minimum drawdown percentage – keeping in mind that drawing more than the minimum will cause your pension balance to deplete at a faster rate.
What Is the Maximum Super Drawdown?
The maximum super drawdown depends on whether you have satisfied the conditions for full or partial access to your superannuation. Specifically, if you have attained your superannuation preservation age, but not yet met the definition of retirement, then you will be limited to a maximum amount of 10% of your account balance, via a transition to retirement pension. However, if you have met the definition of retirement or reached age 65, then you should have full access to your super, meaning that the maximum amount of super you can drawdown is only limited by your account balance.
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