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Retirement is a major milestone, and one of the most important decisions you’ll face is how to access your superannuation savings. The choice you make will shape your lifestyle, financial security, and peace of mind. Broadly, retirees have four main options: an account-based pension, a lifetime pension or annuity, or a lump sum. Understanding the differences and how they fit your goals can help you retire with confidence.
There is no single “best” option. The right choice depends on your financial situation, lifestyle, and personal preferences. Many retirees benefit from combining strategies to balance flexibility and security. Professional advice can help you model scenarios, stress-test outcomes, and make informed decisions so your retirement savings support you for life.
1. Account-Based Pension
An account-based pension (ABP) is the most common way Australians draw an income from their super. It allows you to withdraw a regular income while keeping your money invested.
Key features:
- Flexibility: You can choose the amount you withdraw each year, subject to minimum limits.
- Investment control: Your balance stays invested in chosen options, so your returns and risk depend on market performance.
- Longevity risk: The income lasts as long as your balance does. If your investments perform poorly or you withdraw too much too quickly, your money could run out.
Best suited to retirees who want flexibility, control over investments, and the potential for growth, and who are comfortable managing market risks.
2. Lifetime Pension / Lifetime Annuity
A lifetime pension or annuity guarantees a fixed income for life, regardless of how long you live. These products are usually purchased from an insurer or super fund with a lump sum from your super or available cash.
Key features:
- Guaranteed income: Payments continue for life, protecting against outliving your savings.
- Optional spouse benefits: Payments can continue to a surviving spouse.
- Inflation options: Some annuities can be indexed to keep up with inflation.
- Centrelink Age Pension advantages: Certain lifetime annuities are treated more favourably under the Age Pension assets test, which could increase your pension entitlements compared with holding the same amount in an account-based pension.
- Less flexibility: Once purchased, terms are largely fixed and investment strategies cannot be easily changed.
Best suited to retirees who value security and want protection against longevity risk. Ideal for covering essential expenses like housing, utilities, and daily costs while potentially enhancing Age Pension eligibility.
3. Annuities
An annuity is an insurance product that pays a regular income, which can be short-term, long-term, or for life. In practice, a lifetime annuity is essentially the same as a lifetime pension.
Types of annuities:
- Immediate annuity: Starts paying income right away.
- Deferred annuity: Starts paying at a later date.
- Term annuity: Pays for a set number of years.
- Lifetime annuity: Pays for life, often with options for a spouse or inflation adjustment.
Key difference from account-based pensions – the insurer bears the investment and longevity risk.
4. Lump Sum
A lump sum allows you to take all or part of your retirement savings in one payment. It offers maximum flexibility but also transfers all risks to you. Some retirees use a lump sum for big purchases, travel, or funding family goals.
Key features:
- Flexibility: Spend on travel, home renovation, or invest to generate ongoing income.
- Control: You manage how your money is used and can adjust strategies as your needs change.
- Responsibility: You have full control over the money, but that also means it’s up to you to manage it wisely. Careful planning is needed to ensure your funds last throughout retirement, and there are rules around recontributing withdrawn super, so it’s important to understand your options before taking a lump sum.
- Estate planning: A lump sum gives you the flexibility to leave a financial legacy, whether that’s passing on funds to family, supporting a cause you care about, or gifting to loved ones during your lifetime.
Best suited to retirees who want freedom and control over their money, are comfortable managing investments, or have specific financial goals to fund immediately.
Things to consider when choosing how to fund your retirement
When deciding between these options, consider:
- Longevity and Health: Lifetime income options protect against outliving savings, while a lump sum may suit those with shorter life expectancy or health concerns.
- Risk Tolerance: Lifetime pensions, Account-based pensions and lump sums carry investment risk; annuities transfer that risk to an insurer.
- Lifestyle Needs: Predictable income covers essentials, but lump sums fund large or discretionary expenses.
- Tax Implications: Withdrawals may be tax-free, however once the funds are in your own name, and interest or earnings can result in income tax needing to be paid.
- Estate Planning: Each option has different implications for leaving a financial legacy. Consider how you want to pass on wealth or support loved ones when choosing your strategy.
Combining options
Many retirees benefit from a hybrid approach (sometimes called income layering):
- Use a lifetime pension or annuity to cover essential expenses.
- Keep some funds in an account-based pension for investment growth and flexible income.
- Using a lump sum withdrawal for discretionary spending or legacy purposes.
- Some may also be eligible for a part or full Age Pension, further enhancing retirement income.
This approach balances security, flexibility, and control, helping you enjoy retirement without unnecessary stress.
Final thoughts
There is no single “best” option. What works depends on your finances, lifestyle, and personal preferences. By understanding the differences between account-based pensions, lifetime pensions, annuities, and lump sums and carefully considering your goals you can make choices that give you confidence, security, and peace of mind.
Professional advice is invaluable. Financial advisors can help you model different scenarios, stress-test outcomes, and ensure your retirement savings work for you, not the other way around.
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The Money & Life website is operated by the Financial Advice Association Australia (FAAA). The views expressed in this article are those of the author and not those of the FAAA. The FAAA does not endorse or otherwise assume responsibility for any financial product advice which may be contained in the article. Nor does it endorse or assume responsibility for the information.
