Super - lump sum or pension?

We have long read and heard tales of retirees taking much of their super as a lump sum and rapidly spending all of the money on improving their immediate lifestyles - only to fall back on the age pension.

Such stories have gained increasing attention of late given the prevailing widespread discussions about the future direction of Australia's super system and in the wake of the latest Federal Budget. 

Yet actuary Michael Rice firmly rejects any suggestions that a large proportion of superannuation retirement benefits are withdrawn from the super system upon retirement and quickly spent.

In a recent opinion piece, Superannuation Myths Unbundled, Rice points to research by Rice Warner Actuaries showing that about 85 per cent of the value of all superannuation retirement benefits in dollar terms are invested in super pensions.

Only about 9 per cent of retirement assets in dollar terms were taken as a full lump sum in 2013-14 while the remainder was taken as a partial lump sum.

And at least a third of the money taken as lump sums was "invested in bank term deposits, which is a form of savings, and most of the rest was used to for debt reduction, which is also a form of savings", Rice adds.

And interestingly, he forecasts that 96 per cent all retirement benefits will be taken as an income stream by 2025 as the superannuation system matures.

Part of the reasoning for this forecast is that members will be more inclined to keep their savings in the concessionally-taxed super system through retirement once their balances have grown to more significant amounts. Also, more retirees are likely to leave their savings in super as their level of financial understanding grows.

Some of the confusion about just how much super is being paid out in lump sums would be due to how the statistics are interpreted or misinterpreted.

According to Rice Warner research, almost 60 per cent of superannuation accounts at the time of retirement in 2013-14 had their balances withdrawn as a lump sum or partial lump sum. Yet, as discussed, almost 85 per cent of the retirement benefits are in dollar terms. This shows that many low-balance members are taking lump sums.

Most of us will eventually face the critical personal finance issue of whether to take our super benefits as a lump sum, a superannuation pension or a combination of both.

Ideally, super fund members will address this matter long before their intended date of retirement as it is likely to have a significant impact on their savings patterns before retirement and on their standard of living during retirement.

One of the critical ways that a good financial planner can provide guidance relates to assessing the client's retirement benefits given their particular circumstance and then creating a plan on how to invest in retirement.

A regular superannuation pension - often supplementing an age pension - can make, of course, a significant difference to a retiree's standard of living.

And from a tax perspective, super fund assets backing the payment of a superannuation pension are currently not subject to tax. Further, pensions (and lump sums) payments received by members aged over 60 are not taxed.

Another consideration for retirees is that the personal tax-free threshold of $18,200 for individuals means that a couple can hold relatively valuable portfolio outside super before being liable for tax. (This is aside from the Senior and Pensioner Tax Offset if eligible.)

Indeed, many retirees choose to hold their retirement savings inside and outside super if appropriate for their circumstances. There is much to think about and to discuss with us.