Should You Take a Lump Sum or an Income Stream for Life?
Retiring and having the time to enjoy everything you’ve worked hard for is a wonderful thought. Upon retirement, you’ll be faced with the question of whether to take your pension as a lump sum or receive a regular income for more steady cash flow.
Whether you take a lump sum or an income stream, you can receive it tax-free as long as you’re 60 and above. Otherwise, you’ll pay the tax from getting it before you reach the required age.
Taking a Lump Sum
Only around 16% of Australians take this option and usually, they’re made up of people with small balances – an average of $20,000 – in their super account. Here are the pros and cons of taking a lump sum payment.
- You get more freedom and flexibility on how you want to spend your hard-earned money. You can use it to buy an asset, spend it on travel, or pay off any outstanding debt you have.
- There’s a bigger temptation to spend the money on something unnecessary for instant gratification. If you’re not careful, you might run out of pension money in just a few years.
- When you withdraw your super as a lump sum, you won’t be able to reinvest it into a super account.
Receiving an Income Stream
Most Australians choose to receive a regular income stream for their pension. Here are the advantages and disadvantages of choosing this option.
- It’s a tax-free investment. Unlike other investment vehicles wherein you generally pay taxes on earnings, receiving a retirement pension maximizes the amount you get from your savings.
- You have the ability to choose how much and how often you receive a pension. There’s a limit on the minimum and maximum amount you can get, though, based on your total contribution.
- You receive a regular income just like when you were working. The difference now is that you don’t have to work and you can enjoy your money without a worry in the world.
- You still have the option to withdraw a certain amount of your pension as a lump sum if the need arises.
- Your super balance remains invested while you receive an income stream. This means your money can still grow while you receive a good amount of it on a regular basis.
- An income stream yields a higher return on investment when compared to withdrawing the money as a lump sum and depositing it on a bank for a term deposit scheme.
- You’re not guaranteed to receive an income stream for the rest of your lifetime. You’ll only get the amount you’ve saved through years of hard work. You won’t receive anything after it has been depleted.
There’s also another kind of income stream called a defined benefit fund. The benefits you’ll get from this type of annuity doesn’t depend solely on your contributions and the earnings the fund receives. Your years of service with your employer and your final salary are taken into account in computing how much you’ll get from this type of pension.
A defined benefit pension guarantees a regular retirement income for the rest of your life. The downside is that you can’t pass it on to a beneficiary upon death.
Annuities like this are quite rare nowadays. Only 10% of Australians enjoy this benefit while the rest are enrolled in a defined contribution super fund. Almost the whole public sector has already stopped giving out this type of pension to new members.
There’s really no better choice over the other since everything depends on your personal circumstances which of the two will be the most beneficial to you. If you plan to pay off your debts or start a new business, withdrawing a lump sum from your pension might be the best option. Otherwise, you might want to leave it be and receive a regular income stream to maximize its benefits.