A guide to retirement income streams

What works best for one client will not work well for another, and it is best to look at the pros and cons of each product so that we can work together to match the best product for your needs at that time.

So what are the advantages and disadvantages of each kind of retirement product? It is not simply a matter of picking the retirement income stream that offers the best features, or less fess, as shown in the table below. Most retirees are looking at not being tied into one product during their post-working years, and flexibility will play an important part.

	Account based income streams		Non account based income streams
	Allocated pensions (flexible).	Transition to retirement income streams.	Defined benefit super pensions.	Lifetime pensions and annuities.	Life expectancy pensions & annuities.
How secure is my capital?	Depends on investment options chosen.	Depends on investment options chosen.	High	High	High
Can I withdraw lump sums at any time	Yes	Yes	Depends on the fund rules.	No	Depends on the fund rules.
Can I choose the level of income I receive?	Yes – as long as age-based minimum taken.	Yes – between age-based minimum and maximum 10%.	No	No	No
Is my income guaranteed?	Only until money in the account runs out	Only until money in the account runs out	Yes. By paying institution.	Yes. By paying institution.	Yes. By paying institution.
When must payments commence?	By 30 June in financial year of purchase. May be deferred if purchased after 1 June.	By 30 Junes in financial year of purchase. May be deferred if purchased after 1 June.	Depends on fund rules.	By at least first anniversary of purchase.	By at least first anniversary of purchase.
Must I use superannuation money?	Yes	Yes	Yes	Can be either super of non super.	Can be either super or non super.
Can there be tax benefits?	Yes	Yes	Yes	Yes	Yes
Is it subject to Centrelink/DVA assets tests?	Yes	Yes	Depends on fund compliance with exemption characteristics.	Yes. If purchased before 20 September 2007.	Yes. If purchased before 20 September 2007.
How are death benefits treated?	Can continue to spouse or if to a dependant, for a limited time, or as a lump sum. Non dependants can only receive as a lump sum.	Can continue to spouse or if to a dependant, for a limited time, or as a lump sum. Non dependants can only receive as a lump sum.	Portion continues to spouse or if to a dependant, for a limited time.	Superannuation money – fund regulations apply. Non superannuation – income to nominated reversionary. Lump sums available in guarantee period.	Superannuation money – fund regulations apply. Non superannuation – income to nominated reversionary or estate. Lump sums payable.

Bearing this in mind, account based income streams, such as an allocated or market-linked pension or annuity, offer the most flexibility. Allocated pensions and annuities offer minimum income levels but at the same time can draw down on the capital faster than expected if income levels are increased. On the other hand, market-linked pensions or annuities offer less flexibility in terms of their income stream and the length of the term, but they offer certainty that income will be paid out annually for the term selected.

Non account based income streams such as lifetime and fixed term pensions and annuities, offer less flexibility, but they do offer greater certainty in the length of time that income will be received. Lifetime pensions and annuities offer payment for life but income flexibility is restricted to the level of indexation that applies to the capital in the income stream. Fixed term pensions and annuities work in much the same way, offering an income for the set term, but may expose the retiree to longevity risk if the term is shorter than the life expectancy.

If you would like further information, or assistance with an income stream investment, please contact our office on (02) 9894 9155, option 1, or email taggart@taggartgroup.com.au.

REFERENCE: National Information Centre on Retirement Investments – www.nicri.org.au; as detailed in the April 2012 edition of the Financial Planning Association of Australia’s Financial Planning Magazine, page 43.

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