Sat. Oct 1st, 2022
The Distinction Between Annuities and Account-Based Pensions 

Annuities and account-based pensions are two forms of superannuation income streams. An important distinction is that annuities often provide a fixed return. They are not affected by the stock market or other economic factors. Annuities provide more predictability, but they also lock in your money. Account-based pensions provide greater flexibility, but at a higher risk of return. Some account-based pensions may provide only minor fluctuations in income.

Account-based pensions are provided through super funds and can only be purchased using superannuation advice. Annuities, on the other hand, may be offered by insurers or investment managers. You may be able to purchase an annuity with either super or other funds, albeit this may be subject to different taxation.

Related: The Ideal Superannuation Advice for Investments

What is the limit on the transfer balance cap?

The amount you may transfer from your IRA to other tax-free retirement plans is limited. This is referred to as the balance transfer cap. If your super balance exceeds the balance cap, you cannot transfer it fully to tax-free income streams such as account-based pensions or annuities.

Take the funds and set them aside as an account-based pension

This is not to be confused with the Age Pension; it is a product that you may purchase with the money in your superannuation account. Be mindful that the language might be perplexing – it is more like converting some of your money into an income stream than purchasing something new.

These pensions provide you with a steady income until your superannuation runs out. You have some say over how much you receive in each payment, how it is invested, how much of your super you contribute to this pension, and how frequently you receive this income. However, there are annual income limits that must be met.

This option may save you money on taxes if you are over the age of 60. Money earned under this option is tax-free for both investment profits (the interest gained on money allocated to your pension) and income payments (those you get into your bank account).

Invest Your Money in An Annuity

From the explanation of a superannuation advisor an annuity is another product that you may purchase with your superannuation to provide you with a consistent income stream in retirement. This provides you with guaranteed income payments, either for a specific period of time (fixed-term annuity) or for the rest of your life (life annuity).

A primary benefit of a life annuity is the assurance that you will always have some income (on top of the Age Pension) for the rest of your life. This might be useful if you are concerned that you will outlive your money.

Your Australian superannuation advisor might advices you to purchase an annuity because it will give you more assurance about your retirement income than an account-based pension does. You will have less freedom as a result. Depending on the annuity you purchase, changing the amount of income or the length of the annuity may be difficult or impossible.

The Distinction Between Annuities and Account-Based Pensions 

If you truly need your money, you may usually withdraw it in a lump amount under certain conditions. However, you may not get back what you put in if you do this. Annuities are comparable to term deposits in this regard.

Annuities, unlike other investments, are not affected by stock market changes. This is both a benefit and a disadvantage. On the bright side, you’ll have a consistent source of income regardless of what happens in the economy, even a downturn. However, if the stock market rises, you will not profit as much.

Annuities purchased with your super are tax-free if you are over the age of 60, much like account-based pensions. You can choose what happens to your fixed-term annuity if you die before the term expires. The annuity can be passed on to one or more beneficiaries, such as a partner or child. It should be noted that the income from some annuities may be decreased if you die prematurely.

Review of Retirement Income on Retirement Products

According to some superannuation advisor analysis, there is little assistance available to help consumers pick their retirement income options. Not all funds provide a variety of retirement products, but Retirement Income Covenant can force funds to evaluate what type of retirement income their members require and want. This should result in more retirement products on the market and, as a result, more retirement income for Australians. 

In short, superannuation advisors analysis discovered that encouraging people to spend their retirement funds more efficiently would result in a greater standard of living in retirement.

The Distinction Between Annuities and Account-Based Pensions 

What impact do your decisions have on your age pension?

Remember that pulling money out of your super will have an influence on whether or not you receive the Age Pension. The Omura Wealth Advisers Calculator will assist you in determining how you may be affected. You may get further information about this from our superannuation advisor in Sydney for free. Omura Wealth Advisers is a firm that works to advance and protect the interests of consumers in Australia’s superannuation system.

Investing in superannuation

Although it is feasible to just leave your money in super, this isn’t always the most effective way to use what you’ve saved. Managing your assets more efficiently (including super) may enhance retirement earnings without the need to invest more throughout working life.

The approach is intended to encourage people to use their retirement assets rather than simply living off the interest and leaving the remainder to their relatives. If you maintain your super in accumulation mode, your earnings will be taxed at the same maximum rate of 15% as while you were working and accumulating super. 

Even so, while you won’t pay tax on income streams in most cases, keeping your investments in super may not be the most tax-efficient strategy. Unless you’re still working, you normally can’t contribute to your super after the age of 67. You may continue to put money in if you’re between the ages of 67 and 75, and you fulfil the job test.

Your remaining super balance will normally be invested by your super fund and will fluctuate depending on market circumstances. In retirement, a more cautious strategy may fit you better; your superannuation advisor may assist you with this information.