MONEY MATTERS MONDAY 25TH JUNE 2018
Best Super Fund for Retirement Income
Which is the best super fund to generate retirement income? That’s the question people retiring this July will want answered. Some intending retirees, notably government employees, have the option of a defined benefit pension. Others must determine which fund will earn the most income.
Defined benefit funds
Some defined benefit funds give a choice of pension or lump sum. The pension is usually an attractive income relative to what the lump sum could earn. They provide the security of a guaranteed income for life which may be indexed to inflation.
This is very appealing. The drawback is that there is no residual benefit for family members after death. When the fund member, and their spouse if applicable, pass on the fund balance is zero. They have consumed their capital.
The alternative is to roll the lump sum to an account-based pension that gives full control of the principal short and long term. That means choosing a preferred pension fund and making decisions about the best underlying investments. That may seem daunting.
However, it isn’t as difficult as people assume. There are products and services to make the choice easy, with the job of fund management given to investment specialists. They study the financial markets, research the investment sectors and choose the underlying investments.
Account based pensions run by capable fund managers can earn much better returns than bank deposits. Balanced investment portfolios can earn 6 to 7 per cent per annum on average long term and more growth-oriented ones up to 8 per cent.
It isn’t necessary to actually earn 5 per cent income to receive 5 per cent cashflow to spend. Account based pensions focus on total return, not a target income level. The regular payments to retirees don’t all have to be from interest or dividends.
Pension payments can come from capital gains, growth in unit prices. An allocated or account-based pension is like a large water reservoir. You can turn the tap on faster or slower and the rain will sometimes top it up but what you draw to spend today isn’t equal to last night’s rain.
So retirees and their advisers can choose investments that provide low income but higher growth. Investments selected should reflect the retiree’s tolerance of fluctuations and uncertainty. Those who want certainty and stability can choose conservative options. Their returns will probably be lower.
Retirees who choose more growth options must accept more variations and uncertainty but will usually earn higher returns. Financial planners can help new retirees choose the most appropriate strategies and investment options.
This is general advice and should not be treated as personal advice. Russell Tym is an authorised representative of MoneyLink Financial Planning Pty Ltd ASFL No: 247360.
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