When you stop working, the way your super works changes. Instead of building your balance, the focus moves to turning your savings into a steady, reliable income that can last through retirement. For many Australians, the main way to do this is an account-based pension. Understanding how one works can help you get more from your super and feel more confident about your retirement finances.
What is an account-based pension?
An account-based pension, sometimes called an allocated pension, is an income stream you start with money from your superannuation. You transfer some or all of your super balance into a pension account, and your fund then pays you regular amounts from that account.
The money stays invested while you draw an income, so your balance can keep growing alongside the payments you take. The pension runs until the money is used up. It is not guaranteed to last for life, which is why the way you set it up and manage it matters.
Who can start one?
Generally, you can start an account-based pension once you’ve met a “condition of release”. This most commonly means reaching your preservation age (60 for anyone born after 30 June 1964) and retiring, or reaching age 65, whether or not you’re still working.
If you’re 60 or over and still working, a transition to retirement (TTR) pension may be an option. It works similarly but has extra restrictions. These include a cap on yearly withdrawals of 10% of the account balance, and investment earnings are still taxed at up to 15% until you meet a full condition of release.
How the payments work
You have a lot of flexibility in how you’re paid. You can choose to receive payments fortnightly, monthly, quarterly, half-yearly or yearly. You choose the amount, as long as it is at least the government’s minimum each financial year.
The minimum is a percentage of your account balance that rises with age:
- Under 65: 4%
- 65 to 74: 5%
- 75 to 79: 6%
- 80 to 84: 7%
- 85 to 89: 9%
- 90 to 94: 11%
- 95 and over: 14%
There is no maximum for a standard account-based pension, so you can take more when you need it. You can also usually withdraw lump sums, for example to pay for a new car, home repairs or a holiday. Remember that every extra withdrawal lowers the balance that funds your future income.
The tax advantages
One of the biggest benefits of an account-based pension is how it is taxed. Once your super moves into retirement phase, investment earnings in the pension account are generally tax-free. In comparison, earnings in a super accumulation account are taxed at up to 15%.
For most people aged 60 and over, pension payments and lump sum withdrawals from a taxed super fund are also tax-free and don’t need to be included in your tax return. Together, these advantages can make a real difference to how long your retirement savings last.
There is a limit on how much you can move into retirement phase, called the transfer balance cap. The general cap is currently $2.1 million and is indexed from time to time. Each person has their own cap, so for couples it applies to each partner separately.
How Centrelink treats your pension
If you receive, or hope to receive, the Age Pension, your account-based pension is generally counted under both the assets test and the income test. The balance counts as an asset. For the income test, Centrelink usually applies deeming rules, which assume your balance earns a set rate of income, rather than looking at the payments you actually receive.
Some older pensions started before 1 January 2015 may be “grandfathered” under earlier rules. Changing or replacing those pensions can cause you to lose that treatment, so get advice before making any changes.
Things to consider
An account-based pension gives you flexibility and control, but it also comes with responsibilities. Some key points to think about include:
- Investment choice: The way your pension is invested affects both its growth and the risk of losing value. Investing too conservatively may not keep pace with inflation, while too much risk can be costly if markets fall early in retirement.
- Longevity: Australians are living longer, and your income needs to last. Setting a sustainable income level is one of the most important decisions you’ll make.
- Contributions: You generally can’t add new money to an existing pension. If you make further contributions, you may need to start a separate pension or combine your accounts, which should be planned carefully.
- Estate planning: Nominating a reversionary beneficiary or making a binding death benefit nomination can help make sure your pension passes to the people you intend, in a tax-effective way.
Speak with an MLS Financial adviser
An account-based pension can be the foundation of a comfortable and flexible retirement, but setting it up well involves decisions about income, investments, tax and Centrelink that work best when considered together. At MLS Financial, we’ve been helping clients in Penrith and western Sydney plan for retirement for over 20 years. Our advisers can help you set up an income stream that fits your lifestyle and goals, then review it regularly as your needs change. Contact us today to arrange a time to talk.
Written by:
Adrian Guy – BBus (Finance & Economics), MLS Financial
Disclaimer:
This information is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider speaking to a qualified financial planner before making any financial decisions. MLS Financial and Infocus Securities Australia Pty Ltd do not accept responsibility for actions taken based on this content.