Pension or Annuity ?

When you reach your preservation age or stop work, the money in your superannuation account, less any taxes that apply, is generally paid to you as a lump sum.
What then do you do with it, to make sure it provides for the lifestyle you want in retirement?
One option is to convert your lump sum into a complying annuity or allocated pension.
The difference between a pension (not to be confused with the government aged pension) and annuity is that pensions are provided through super funds and annuities are purchased through life insurance companies.
There are four types of pensions and annuities…lifetime pensions, allocated pensions, lifetime annuities and allocated annuities.
The most common of these are allocated pensions and lifetime annuities.

An Allocated Pension allows you to invest your super lump sum (also referred to as capital) in an individual account that allows you to withdraw funds on a regular basis. The lump sum benefit is “rolled over” to an Allocated pension account where you can usually select from a number of investment options to help grow your retirement savings.
You can choose how often you receive your payments, although you must withdraw part of your account balance each year and unlike a traditional pension, this income is not guaranteed in any way as the capital is exposed to the ups and downs of investment markets in the same way as your super account.
Investment earnings are allowed to grow tax free in your account and any lump sum tax is deferred until you make a withdrawal so more of your money is working for you up front.

A Lifetime Annuity allows you to invest your lump sum in exchange for receiving a series of regular income payments for life or a specified period of time. Unlike an Allocated pension, these Annuities can be purchased with any lump sum, not just your super benefit and are sold through life insurance companies.
A fixed rate of income can be set (generally reflecting current market rates) and guaranteed when you purchase the annuity so it is not affected by economic conditions or changes to interest rates.
However, you do not have the flexibility to invest your money across a range of assets, including growth assets like shares, which may impact on the total income you receive.
Lifetime Annuities also have tax and social securities advantages. The capital or purchase price to buy certain Annuities can be exempt from assessment by Centrelink under the pensions asset means test.

Pros and Cons.

Allocated Pensions
Pros;
Regular payments with ability to withdraw lump sums when needed.
Can change your income level to suit your needs within Government limits.
You can choose where your money is invested including growth assets
Cons;
There is a risk that your money could run out before you die.
The investment risk is carried by you.
Account is susceptible to ups and downs in investment markets.

Lifetime Annuities.
Pros.
Regular payments, which can be indexed to CPI
Payments continue for whole of life.
The income is generally guaranteed by the provider.
Cons;
Generally cannot withdraw lump sums and there is a risk that your income may not meet your needs.
Cannot change payment frequency or amounts.
Income payment amount is locked in at time of purchase.

Source; Hesta (John Belanti) March 2003

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