Account-based pensions, also known as allocated pensions, are a regular income stream you can use once you reach preservation age. It works by rolling over your superannuation balance in your “accumulation” account into a new “account-based pension” account. Based on current rules, the earnings on your investment in the account-based pension are tax-free; you will be required with withdraw a certain minimum percentage of your account balance each year, with the percentage based on your age.
If you’re eligible for the government Age Pension as well as your account-based pension, you can receive varying levels of income from both your account-based pension and the Age Pension.
Thanks to the superannuation guarantee (SG) scheme that has been in place for 24 years now, most workers in Australia will have some superannuation when they retire. When they reach their preservation age, they have the choice to do one of four things:
- Leave their superannuation alone if they don’t need it yet.
- Withdraw their superannuation as a lump sum to spend or invest elsewhere.
- Use their superannuation to purchase or “roll over” into an account-based pension.
- Withdraw part of their superannuation as a lump sum and roll over the remainder into an account-based pension.
An account-based pension is easy to set up. Most super funds have specially designed accounts for pensions, offering you the ability to draw down your account balance at regular intervals (e.g. monthly, quarterly, half-yearly, or annually). It can feel like receiving a regular wage again, except that it’s coming from your account-based pension account, not your employer.
An account-based pension has one large advantages over withdrawing your money in a lump sum, which is that it is a tax-effective way to receive your super since the earnings on your money in an account-based pension are tax free.
There are just a few rules that you have to follow in order to satisfy the ATO’s requirements for an account-based pension. The main rules are as follows.
Rule 1: You must be “old enough” or meet other conditions to retire
You can access your superannuation only if one of three “conditions of release” are met:
- You have permanently retired from the workforce after reaching your preservation age; or
- You have reached age 65; or
- You have become totally and permanently disabled.
Your preservation age depends on when you were born. You can find out what your preservation age is using the ASIC MoneySmart super and pension age calculator.
A transition-to-retirement (TTR) pension is also a possibility, although the government has announced upcoming changes to the tax rules relating to TTR strategies; discuss these changes with your financial adviser.
Rule 2: Cash withdrawal must be made each year
If you’ve chosen to open an account-based pension rather than leaving your super untouched, then you must withdraw between 4-14% each year. How much you must withdraw each year depends on your age:
(% of account balance)
|Source: ASIC (MoneySmart)|
You can make these income payments happen as often as you want (monthly, quarterly, half-yearly, or annually) but you must continue drawing down money until the account balance is exhausted.
How much you draw down will affect how much you are eligible to receive from the government Age Pension.
You can withdraw some or all of your pension account in a larger lump sum, but again, this will then be taxed if you invest it elsewhere, and it will affect your eligibility for the Age Pension. If you want to, you can roll over the lump sum back into a super accumulation account like you used to have before opening the account-based pension account.
Your fund is responsible for ensuring you draw down the minimum amount each year – but if you have an SMSF type super fund, that means you are responsible for making sure you get it right. CANSTAR would always advise that SMSF Trustees get qualified financial advice about how much to withdraw in a given year.
Rule 3: If you’re in transition to retirement, you can’t withdraw it all
Normally, you can withdraw some or all of your account-based pension balance in a lump sum. However, if you are in a transition-to-retirement (TTR) pension, you cannot withdraw all of your balance and you can only withdraw up to 10% of your balance each year.
Rule 4: It doesn’t last forever
This one isn’t so much a rule as a fact of life. Your account-based pension is not guaranteed to last for a set period of time or even for the entirety of your retirement.
How long your superannuation pension lasts will depend on how much you withdraw each year, the returns on the investments your account balance is invested in, and the amount of fees you pay.
You can use the ASIC MoneySmart account-based pension calculator to give you a rough idea of how long you could expect an account-based pension with a certain balance to last.
Rule 5: An account-based pension may affect your Age Pension
If you have an account-based pension, this will affect your eligibility to receive the Age Pension.
This is because your entitlement to a full or part Age Pension depends on the government’s income test and assets test – and your account-based pension is assessed under both of these tests. The more assets and income you are judged as having, the less Age Pension you are entitled to receive.
Under the assets test, the entire balance of your account-based pension is counted as an asset. Under the income test, the amount assessed depends on when you started your pension:
If you started receiving an account-based pension before 1 January 2015, and you have been receiving an Age Pension payment since 31 December 2014, then your assessed income is the gross payment you get from your account-based pension, minus your capital returns.
If you started receiving an account-based pension on or after 1 January 2015, then Centrelink treats your account-based pension account as a financial asset and uses the deeming rules to determine your ‘deemed income’ from your account-based pension. These rates differ depending on your situation, and can be found on the deeming rules web page under the section titled ‘How we work out your deemed income’. For example, if you’re a member of a couple and at least one of you get a pension, then the first $85,000 of your combined financial assets has the deemed rate of 1.75% applied. Anything over $85,000 is deemed to earn 3.25%.
You can contact a Centrelink Financial Information Service Officer or your financial adviser to see how your income will affect your Age pension eligibility. A good financial planning adviser should be able to tell you how you should structure your withdrawals so that you can receive the maximum benefit from both the Age Pension and your account-based pension.
Rule 6: When you die, the money goes to your beneficiary or your estate
When you pass away, any remaining balance in your pension account is paid to the beneficiary you have nominated with your super fund.
Reversionary beneficiaries: If you nominate a “reversionary beneficiary”, then that person can actually receive your account-based pension withdrawals until the account runs out. If that person is a child, they can receive your account-based pension withdrawals until age 25, when they will receive any remaining balance as a lump sum.
Death benefit payments: If your beneficiary is your spouse or dependant, they can choose to receive the death benefit payment from your superannuation as a pension income stream or as a lump sum. Non-dependent beneficiaries can only receive super death benefits as a lump sum.
Choosing the right fund
There is no obligation to remain with your current superannuation fund when you are ready to enter the pension phase and open your account-based pension. There are many different providers and products to choose from.
In 2016, CANSTAR has researched and rated 64 account based pension products from 58 different providers. You can preview these products below in our comparison table snapshot. Please note that this table has been formulated on the basis of a balanced investment and is sorted by the total annual cost at $250,000 (lowest to highest).