Your options on retirement
WHEN you retire you have three options. The first is to take your lump sum in cash, pay exit tax if appropriate, and invest outside the superannuation system.
This is not a smart thing to do as you can lose up to 16.5% of your money in unnecessary exit tax, and then are faced with paying normal tax on the income from your investments.
A favoured option is to start an allocated pension fund with your superannuation because when you do this, your fund becomes a tax-free fund. If you are 60 and over, all withdrawals are tax-free too, but if you are aged between 55 and 60, the income stream will be taxable but will qualify for a 15 percent rebate - this will make it tax-free for most people.
Provided you are not unduly risk adverse, it pays to have a sizeable proportion of the assets of the allocated pension fund invested in growth assets. These give the highest returns over time, and will help to ensure that you do not outlive your money.
The major benefits of allocated pensions are that you can vary your pension at will but you must take the required minimum set by the government, you can make lump sum withdrawals when you wish and when you die, any residue is available for your estate. Alternatively your spouse can continue to receive your pension.
If you have a substantial amount of assets outside the superannuation system you may be better off leaving your money in superannuation, and not starting an allocated pension.
Remember, there is now a limit on contributions, which means that you have a large chunk of money sitting outside superannuation and creating income that is taxed at your marginal rate.
If you are in this situation, you are probably better off to leave your money in superannuation where the earnings are taxed at just 15% and do not make any withdrawals from it until you have run down the assets that are outside superannuation.
Noel Whittaker is a director of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is email@example.com.