Account based pension or annuity – which income stream is better?

What is the difference between account-based pension and annuity, and which one is better?

Once retired most people will need to start drawing income from their savings, and as mentioned before, superannuation most likely will be the biggest investment you have outside of your family home.

So now you will need to decide what to do with your superannuation savings and how to be provided with the best income level for your needs.

And it is not as easy as one might think, as there are many ways to skin the cat, and you need to find that one way that is just perfect for you.

And because we are all different in every possible way, your way could be completely different to the way savings are set up for you friends, neighbours or other family members.

Let’s go over the main features of each income stream:

How long will your income last?

How is money invested?

Can I access my savings?

What happens to my money if I die?

Can I start the income stream with my private money?

What is the treatment of the income stream for Age Pension?

VIDEO MENTIONED:
Accumulation and Pension Phase of superannuation
Account Based Pensions
Annuities and your retirement

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As people reach retirement age, they are faced with the decision of how to best manage their savings to provide a steady income for their post-working years. Two popular options for generating income in retirement are account-based pensions and annuities. Both options offer a regular income stream, but there are some key differences between the two that retirees should consider when making their decision.

An account-based pension is a type of retirement income stream that allows individuals to draw down on their superannuation savings. The amount of income received is determined by the performance of the underlying investments and the amount of money in the account. Account-based pensions offer flexibility and control over the investment choices, and retirees can choose to increase or decrease their income payments as needed. However, the downside of an account-based pension is that there is a risk of running out of money if the investments do not perform well, and the income is not guaranteed for life.

On the other hand, an annuity is a financial product that guarantees a regular income stream for a set period or for the rest of the recipient’s life. Annuities are typically purchased with a lump sum of money and offer the security of a predictable income, regardless of market fluctuations. With an annuity, retirees do not have to worry about managing their investments or the risk of outliving their savings. However, the trade-off is that annuities offer less flexibility and may not keep pace with inflation, which can erode purchasing power over time.

So, which income stream is better for retirement? The answer ultimately depends on the individual’s specific financial goals, risk tolerance, and personal circumstances. Account-based pensions are better suited for retirees who want control over their investments and the flexibility to adjust their income payments. They are also a good option for those who want to leave a legacy for their beneficiaries, as any remaining balance in the account can be passed on to heirs. On the other hand, annuities may be a better choice for retirees who prioritize security, guaranteed income, and the peace of mind of knowing they will not outlive their savings.

In some cases, a combination of both account-based pensions and annuities may be the best approach to retirement income planning. This can provide retirees with the flexibility and control of an account-based pension, as well as the security and longevity protection of an annuity.

Retirees should carefully consider the features and benefits of each income stream before making a decision. Consulting with a financial advisor can also help individuals make an informed choice that aligns with their retirement goals and financial situation. Ultimately, the decision between an account-based pension and an annuity will depend on the individual’s unique needs and preferences.