Australia’s retirement policy has always had one feature shared by few other countries – we allow retirees to take all their money out of super and do whatever they want with it.

This flexibility constantly allows critics to claim that many retirees face some sort of moral hazard in that they will waste their retirement money on consumables or luxuries, such as holidays, and then go on the Government’s aged pension.

It’s true that new retirees are keen to enjoy their newfound freedom and travel around Australia and abroad. They might also use some of their super to pay off their mortgage and other debts, renovate their home or update their motor vehicle and home furnishings.

But use all their super savings? Yes, this definitely happens in some cases but it’s rare. For some people, ready access to a large amount of money burns a hole in their pocket.

However, most retirees recognise that aged pensioners aren’t particularly well off, retirement might last many years and retirement homes later in life probably have to be funded.

The family home is a powerful asset

According to the Centre for Independent Studies, over 90% of retirees own their family home and don’t have a mortgage.

There are three main advantages with this approach:

1. It is often cheaper to own a house than rent, as well as the ongoing emotional attachment to the building and locality.
2. Bequeathing the family home to surviving children receives various tax concessions, especially Capital Gains Tax and State or Territory duties exemptions or reductions.
3. The home is exempt under the Age Pension Assets Test – in reality, homeowners are treated very favourably under this test.

By the time retirees have reached their early to mid eighties, the majority of their super and other savings have been used, however most still own their home.

Lump sums versus pensions

The two main attractions of super pensions in SMSFs for those aged at least 65 are their tax-free nature – both the investments themselves and the income paid – and the fact that there is no maximum on the income drawn.

However, super pensions come with various restrictions and costs including the following:

1. You must take income each year and that income must satisfy a specific minimum – for example, if you are at least 65 years in age but less than 75 years, then 5% of the market value of your pension’s assets has to be paid as income each financial year.
2. These minimum income factors increase as you get older. And you have to take this minimum income even if you don’t want or need it.
3. The income in most cases must be paid with cash.
4. Your fund might need an actuarial certificate each year if you have pension and non-pension money in your fund.

What about lump sums? The main advantage with lump sums is their flexibility. Once aged at least 65, lump sums can be taken at any time for any amount. In other words, you only take out what you need and you’re not restricted by the minimum pension income rules.

There are two disadvantages with lump sums:

1. Although you might be retired, the income and realised capital gains from your super assets (if not used to support a pension) will be taxed at 15%.
2. Your fund needs to complete paper work every time a lump sum is paid and your SMSF administrator may charge a fee to organise and record each payment; this includes the need to recalculate your taxable and tax-free components on the day each lump sum is paid.

Centrelink assessments

From 1 January 2015, lump sums and pensions are treated in the same way for Centrelink age pension purposes. Under the income test, the pension is deemed and the market value of your super assets is counted for the assets test.

What’s the better option?

For most people, the full tax exemption from pensions will prove the better option – as well as the ability to take lump sums whenever necessary.

However, some will prefer the complete flexibility of the lump sum approach.

The good news is that if you feel you have made the wrong decision, then with good paper work, you can easily change your mind.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.