When you retire and gain access to your superannuation, you face an important decision: how to use your savings to fund your retirement. The right choice depends on your financial situation, lifestyle goals, and long-term needs.
You generally have four main options:
- Withdraw your super as a lump sum
- Convert it into a retirement income stream (such as an account-based pension or a lifetime income stream)
- Leave it in accumulation phase
- Combine these options
Let’s explore each in detail.
Option 1: Taking a Lump Sum
Withdrawing your super as a lump sum gives you full control over your money. Some retirees choose this option to pay off debt, make a large purchase (like a home renovation or new car), or invest outside of superannuation.
Things to consider:
✅ Immediate access to your money – You can use it however you like.
✅ Debt reduction – Paying off a mortgage or other loans can reduce financial stress.
✅ Investment flexibility – You can invest outside of super if you prefer other options.
⚠️ Risks and downsides:
❌ Tax implications – If you’re under 60, some withdrawals may be taxed. Over 60, most withdrawals are tax-free.
❌ Longevity risk – If you spend too much too soon, you may outlive your savings.
❌ Loss of superannuation benefits – Funds in super are generally taxed at a lower rate than personal investments.
A lump sum may be useful for major expenses, but withdrawing too much too soon can leave you short later in retirement.
Option 2: Starting a Retirement Income Stream (Account-Based Pension or Lifetime Income Stream)
When you retire, you can convert your super into a retirement income stream, providing regular payments while keeping your retirement savings invested.
There are two main types of retirement income streams:
- Account-Based Pension – Flexible, investment-linked income that can rise and fall based on market performance.
- Lifetime Income Stream (e.g., an annuity) – Guaranteed payments for life, regardless of market movements.
1. Account-Based Pension
This option allows you to withdraw money regularly while keeping your balance invested.
Pros:
✅ Flexible withdrawals – Choose how much to take (above the government’s minimum requirement).
✅ Tax-free income – If you’re over 60, pension payments and investment earnings are tax-free.
✅ Investment potential – Your money stays invested, helping combat inflation so that your retirement income keep pace with the cost of living.
Cons:
❌ Not guaranteed for life – If withdrawals are too high or investment returns are poor, you could run out of money.
❌ Market risk – Your super balance fluctuates based on investments.
2. Lifetime Income Stream (Annuity or Lifetime Pension)
A lifetime annuity or similar product provides a guaranteed income for life in exchange for an upfront lump sum. This can be particularly useful for longevity protection and when means-tested for Centrelink Age Pension benefits.
Pros:
✅ Guaranteed income for life – No risk of running out of money.
✅ Can improve Age Pension eligibility – Only part of the annuity is counted under Centrelink’s assets and income tests, potentially increasing your benefits.
✅ Peace of mind – Not affected by market downturns.
Cons:
❌ Less flexibility – There are restrictions on accessing your lump sum once invested.
❌ Returns may be lower – Compared to investing in a market-based portfolio.
Combining Both for a Balanced Approach
Some retirees combine an account-based pension and a lifetime income stream to balance flexibility and security. For example:
- Use an account-based pension for daily living and lifestyle spending.
- Purchase a lifetime income stream to cover essential expenses (e.g., food, utilities, medical costs).
This strategy helps ensure you don’t outlive your money while keeping some financial flexibility.
Option 3: Leaving Your Super in Accumulation Phase
If you don’t need access to your super immediately, you can leave it in the accumulation phase. This allows your savings to continue growing in a tax-friendly environment.
Benefits of leaving super in accumulation phase:
✅ Lower tax on earnings – Investment earnings inside super are taxed at 15%, which is often lower than personal tax rates.
✅ Ongoing investment growth – Your money stays invested for potential future use.
✅ Flexibility – You can start a pension or withdraw a lump sum later.
⚠️ Things to consider:
❌ Limited access – You won’t have regular income from super if you leave it untouched.
❌ Higher tax compared to a pension – Earnings on account-based pensions are tax-free, while super in accumulation is taxed at 15%.
This option is best for those who have other sources of income and want to maximise their super’s growth.
Combining These Options: A Balanced Approach
Many retirees use a mix of these strategies. For example:
- Take a small lump sum to clear debts or fund a holiday.
- Convert the rest into an account-based pension for a steady income.
- Leave a portion in accumulation for future use.
- Purchase a lifetime income stream to secure a base level of income for life.
This balanced approach helps you enjoy financial flexibility while ensuring your savings last.
Other Factors to Consider
Government Age Pension & Super Withdrawals
- The amount you withdraw from super can impact your eligibility for the Age Pension.
- If you have large assets outside super, you may reach the asset test limit sooner.
Estate Planning
- Consider who will receive your remaining super if you pass away.
- Superannuation doesn’t automatically form part of your Will, so nominating beneficiaries is crucial.
Tax & Financial Advice
- Tax rules can be complex, and the right option depends on your situation.
- A financial planner can help structure your retirement income in a tax-effective way.
Final Thoughts
Superannuation is a powerful tool to support your retirement lifestyle, but how you access it makes a big difference. Taking a lump sum, starting a pension, or leaving your super invested all have pros and cons.
A well-planned approach—potentially combining options—can help ensure your savings last and provide the retirement you’ve worked hard for. If you’re unsure which strategy is right for you, seeking financial advice can give you confidence in your decision.
Want to discuss your retirement options?
Let’s have a chat about how to make your super work best for you.