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Understanding account-based pensions

December 2020

One day you’ll be ready to retire. Then you can stop working and spend more time doing the things you enjoy. But what are your options when it comes time to access your super?

Once you decide to retire you can access your super as a lump sum or start an account-based pension (also known as an income stream) or do a combination of both. The benefit of starting an account-based pension is that it provides a regular tax-effective income during your retirement.

How does an account-based pension work?

Account-based pensions can be a great, tax-effective way to meet your income needs in retirement. An account-based pension allows you to receive a regular income from the superannuation you have accumulated prior to retirement. Generally payments can be made monthly, quarterly or annually.

The maximum you can transfer to an account-based pension is currently $1.6 million.

When can you start an account-based pension?

The income stream from an account-based pension can usually be paid to you once you've reached your preservation age and permanently retired from work. In some circumstances, if you meet an alternative ‘condition of release such as terminating employment after age 60, reaching age 65 or becoming permanently incapacitated.

You may be able to access your super before you retire by starting a ‘transition to retirement’ pension (see below).

What's your preservation age?

When were you born?

Your preservation age

Before 1 July 1960

55

1 July 1960 – 30 June 1961

56

1 July 1961 – 30 June 1962

57

1 July 1962 – 30 June 1963

58

1 July 1963 – 30 June 1964

59

After 30 June 1964

60

Investing your pension

Your account-based pension account can hold a range of investments – including shares, fixed interest, cash and managed investments – depending on the investments offered by your fund.

Minimum pension payments

As legislated by the Government, every year you will need to withdraw a minimum pension payment. This is calculated according to your age. There is no maximum payment amount.

The Government has recently announced the temporary halving of the minimum that you must draw from your super pension to help minimise the impact of current economic conditions on retirees due to the COVID-19 pandemic.

The reduction applies for the 2019/20 and 2020/21 financial years.

Age

Default minimum drawdown rates

Reduced minimum drawdown rates for 2019/20 and 2020/21

Under 65

4%

2%

65 to 74

5%

2.5%

75 to 79

6%

3%

80 to 84

7%

3.5%

85 to 89

9%

4.5%

90 to 94

11%

5.5%

95 or more

14%

7%

More information on changes to minimum pension drawdown requirements.

Tax benefits of account-based pensions

An account-based pension can be more tax-effective than taking your super as a lump sum. This is because the earnings from investments in your account-based pension are not subject to tax. These earnings remain in your account and increase the account balance .

Both lump sum and pension payments from your account-based pension are not subject to tax once you turn 60.

How long will your pension last?

How long your pension will last depends very much on what you want to do in retirement, how much super you have, how much you withdraw as a pension, the investment returns and the amount of fees. So, careful financial planning is important.

To work out your income in retirement and how long it will last using your current circumstances as a base, visit the Government’s Moneysmart retirement planner calculator.

Using a transition to retirement pension before you retire

If you've reached your preservation age, you can generally access between 4 and 10% of your super balance each year even if you’re still working through a transition to retirement pension.

Unlike a full account-based pension, you can’t take a lump sum. In addition, the investment returns are subject to tax.

A transition to retirement strategy can be used in two ways:

  • Reduce your working hours while maintaining the same income
  • Save money by reducing your tax bill

A transition to retirement strategy could give you more time to save for retirement or to build additional emotional stability by allowing you to slowly ease into retirement.

For more information on a transition to retirement strategy refer to the article ‘How to manage your wealth in retirement’.

What happens to your pension after you die?

An account-based pension can last for your lifetime, as long as your account holds enough money, and can be transferred to your beneficiary (generally your spouse or partner) after you die.

Types of beneficiaries
There are three types of beneficiaries you can nominate - non-binding, binding and reversionary.

If you nominate a reversionary beneficiary the nominated person will automatically continue to receive the pension after your die.

Advantages of receiving a reversionary pension

  • There is no urgency to deal with death benefits at a time of grief as the pension automatically switches from you to your reversionary beneficiary.
  • Generally, the pension continues to be not be subject to tax for your beneficiary, or at least concessionally taxed, depending on the age of you and your beneficiary
  • Earnings are not subject to tax in the fund.
  • The pension remains in the super environment. In contrast, by receiving a death benefit as a lump sum (through a binding or non-binding death benefit nomination) some beneficiaries would not be able to contribute that money back into super due to age restrictions.

Make plans for your retirement

Retirement can and should be a rewarding and enjoyable phase of your life, so ensure you plan for it properly and understand what your choices and options are.

If you need help with your retirement planning, please contact your financial adviser.

 

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Taxation law is complex, and this information has been prepared as a guide only and does not represent taxation advice. Please see your tax adviser for independent taxation advice.

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