Receiving regular and reliable income in retirement is the most important goal for our clients as they exit the workforce.  Financial planners also aim to make this income stream as tax and Centrelink efficient as possible, this is often through the superannuation system.

Within in the superannuation system, once we move to pension phase there are two main income streams, allocated pensions and annuities. Each has different strengths and weaknesses and performs a different role in providing income in retirement.

Allocated pensions (or account based pensions) are by far the most common income source in retirement.  An allocated pension allows you to invest in a wide range of investment options that you select. You are able to choose the level of income you receive and are able to take out lump sums as required. The value of the fund will go up and down in line with the investment returns and withdrawals. Simply, if you take more money out than the fund returns,  the value will decrease.

Once the funds run out, then the account is closed and you will no longer receive an income. The value of the fund is assessable for Centrelink assets tests and deeming rates apply for the income test. The income received and earnings are tax free as long as the client is over age 60.

Allocated pensions are flexible but not overly Centrelink friendly, the client bares the investment risk and longevity risk.

Annuities work differently; they are considered more conservative and are less flexible. They are also more Centrelink efficient. Annuities involve investing your money for a set period (or lifetime) with the level of income provided being determined up front and paid at regular intervals (usually monthly). The interest rate is established up front and the annuity provider bares the risk.

With term annuities you nominate a payment period ranging from 1 year to 15 years. You also nominate how much of your funds you would like returned to you at the end of the period. There are usually options to nominate if you would like your payment to be inflation adjusted.

A lifetime annuity pays you for the rest of your life. There are options to have the payment continue to your partner if you pre-decease them. Once you (and potentially your partner) die, the payment ceases. Modern annuities offer some flexibility around this with guaranteed payment periods and options to access your cash for a period of time.

Annuities transfer both investment risk and longevity risk to the provider. The Centrelink assets test and income test both have calculations that are more favourable to the client with annuities.

Using a combination of both of these income streams often provides well rounded income strategy for retirement.