You've saved hard all your working life to build up a sizeable superannuation nest egg and now you want to turn your retirement savings into regular income you can live on. But choosing between the different types of retirement income products has left you even more confused. This SelectingSuper retirement income stream guide should help.
By Alex Dunnin

KEY POINTS
When you retire you should consult Centrelink and your financial adviser. If investing in an income stream you should also consider obtaining independent legal advice. Pensions are paid from a super fund while annuities are paid from a life insurance company. The main types of income stream products are account-based and non-account based.  Account-based products are the most flexible as you are able to vary the amonut of money you receive and withdraw while also letting you choose your own investment strategy. Allocated pensions are a type of acconut-based income stream. Non account-based income streams are products that you purchase outright and the provider promises to pay you an agreed amount of regular income each month, quarter or year over the period of the contract. The most common types are lifetime, dixed term and market linked. The factors to consider when setting up your income stream are how long do you think you'll need to receive payments for, are you willing to accept the investment risk, will you want access to extra money and what do you want to happen to any outstanding capital after your death.

You've worked hard for years and saved up a sizeable retirement nest egg and now you want to retire. This simple decision however puts you right into the thick of decisions about how you should structure your retirement income streams to maximise your Centrelink entitlements, minimise your tax liabilities and ensure that your money lasts as long as possible. 

To make it all happen smoothly, the first thing you should do is contact Centrelink and arrange to speak to one of their Financial Information Services Officers. These specialists however are not financial advisers and they will not give you investment and product advice, but they will explain to you what your Centrelink entitlements are, how the various assets and income tests may work, and how you may wish to structure things to maximise your entitlements regarding the age pension, health care benefits and other assorted benefits.

The second thing you should do is talk to your super fund and ask them to explain how they can help you. For example, many super funds now offer a range of products designed specifically for people who have retired and you need to understand how they work and which ones may be suitable for you. 

The third thing you should do is probably the most important. You should arrange a meeting with your financial adviser because choosing the right retirement product can be a very complex decision. Indeed, it may even be a good idea to road test several financial advisers. While most quality super funds now have their own financial advisers, and you may have already spoken to one at your own fund, you should probably meet with an independent adviser just to get a second opinion.

Even if you are familiar with retirement income stream products, under the new Better Super rules there have been some changes and you should get advice on how these may affect you. Like whether super now being tax-free for people over age 60 means you should rethink your investment strategy, and how the more flexible ways you can access your super might mean you could be better off just staying with your current super fund rather than transferring your money into a new retirement fund or annuity.

And don't forget that under the new rules the assets and income tests have now been relaxed so more people are eligible to receive the age pension. This may change the way you set up your retirement investments and so even if you think you know what you should do, talking to an adviser may be good idea anyway, just as a safety check. 

Income Streams and Their Key Features

		Allocated		Lifetime		Life expectancy		Fixed term		Market linked
Flexibility of income		Yes, but some limits		Generally no		Generally no		Generally no		No, but depends on level of investment income
Payments are guaranteed		Not usually		Yes		Yes, for agreed term		Yes, for agreed term		Not usually
Can access capital for special purposes		Generally yes		Generally no		Generally no		Generally no, subject to agreement about residual		Generally no
Investment choices		Generally yes		No		No		No		Generally yes
Good for estate planning		Yes		No, but loss of capital in some cases		Yes		Yes		Yes
Source of investment		From super only		For pensions, from super		For pensions, from super only		For pensions, from super only		From super only

Source: Adapted from the Department of Families, Community Services and Indigenous Affairs

Retirees have different investment needs

When you were still working you were only concerned with what is known as the 'accumulation' phase of superannuation, meaning how to pick the right investments to help your super grow as fast as it could without taking too much risk. 

When you retire however, the game suddenly gets more complicated because this is probably the last pot of money you're likely to come across and you need to make sure nothing goes wrong. On the flipside, you'll probably need this money to last 30 years or more.

This is why you have to think about whether to take the money as a lump sum, as a regular weekly, monthly, quarterly or yearly payment (which is why it's referred to as an "income stream"), and how do you do this in such a way where you maximise your Centrelink entitlements and total income.

Different types of income streams 

Two important income stream terms are "pensions" and "annuity". It is a pension when you receive the income stream payment from a super fund, and it is an annuity when you receive it from a life insurance company - even if it's only a technical distinction, knowing these terms is still helpful. 

The differences are important because with a pension you are probably already a member of a super fund and swapping into their pension division has the potential save you heaps of money in exit and re-rentry fees, but make sure it's the income stream arranegment you want and not one that you just feel stuck with. 

Regardless of what you choose, the big issues are now what level of regular income you wish to receive, do you want the amount to step up each year (say by 1, 2 or 3 per cent to cover expected inflation), do you want to be able to choose your own investments or do you want certainty about your regular payments? 

This brings us into the next phase of sorting between income streams which is deciding whether you want an "account-based" or "non account-based" income stream.  

An account-based income straem simply means one where the value of your income stream account - or remaining capital - at any one time reflects the amount of money you have invested in the product, called its capital value, less the amount of money paid in regular payments plus any interest that has been credited due to investment returns.

As this explanation implies, these account-based income streams are the most flexible because they let you choose your investments and choose how much money you wish to draw down. The downside is of course that the money can run out, but that's where good planning comes in.

Non account-based income streams, in contrast, are income streams where you don't actually have an account because your agreement with the provider is that in return for the purchase price (say $400,000) they will pay you an agreed amount each month (say $1700) until you die. Because you receive your payment at the agreed amount every week or whatever regardless of investment market conditions, the idea of an account balance has no meaning and thaty's why it doesn't have one.

The key point to understand when choosing between all these options is how much flexibility and control you want and how much investment risk are you prepared to tolerate. This is because while account-based income streams are very flexible, if you make poor investment decisions or spend all your money then that's it. But with non account-based income streams all the worry is taken over by the provider, meaning that while you don't have nay say in the investments you conversely don't have to worry about investment returns.

Account-based income streams

The most flexible type of income stream products are allocated pensions and allocated annuities, recalling they are the same thing except the former are offered by super funds and the latter by life insurance companies.

They are the most flexible because they usually give you a full range of choices about how often you want to receive your regular payments, whether would like to withdraw lump sums from time to time for special purposes (like going on a holiday, repairing your house or buying a car), and they let you choose from a broad range of investments that may include diversfied investments like growth, balanced, conservative and capital protected funds, or let you choose from a larger range of Australian and international equity funds, property funds, fixed interest funds, cash funds and even alternative investment funds.

Because these allocated income streams are so flexible, the downside is that it's possible you will use up all your money before the end of your life, which will force you to have to rely solely on the age pension. The flexibility of allocated pensions or annuities is why they are so popular accounting for nearly 80 per cent of all income stream products sold in Australia.

When setting up your account-based income stream, one of the first things to decide is how much regular income you need. As a retirement product, it should come as no surprise that the amount you can withdraw each year is linked to your age. This is because the government wants to encourage you to spend the money on yourself rather than leave it all in your estate.

For exmaple, if you are aged 65-74 you must withdraw at least 5 per cent each year as regular income. This ratio steps up in five-year increaments so taht by the time you are age 95 or more you must withdraw 14 per cent each year.

Non-account-based income streams 

We've already explained how you can protect yourself against your money running out by choosing a non-account based income stream. The trade-off for this guaranty of certainty is that the size of the regular payments you will receive will be lower than in a regular allocated income stream, which is another way of saying they have higher embedded fees.

The fees are higher because your income stream provider has to make sure there is enough money to pay you each week, month, or year and the longer they expect you to live the more careful they have to be in planning your income stream. In other words, the fees are higher because they have to be compensated for taking on this risk and for doing all the homework to ensure it's done properly.

Since the income stream provider has to ensure your money lasts over a guaranteed period, you generally will not be allowed to withdraw any extra money for those special purposes, no matter what the reason.

The four main types of non account-based income streams are life expectancy income streams, fixed term income streams, life expectancy income streams and market linked income streams.