What is an account-based pension?

If you’ve spent your working life building up a super fund, when it comes to retirement or semi-retirement, you’ll want to know what to do with the money you’ve accumulated.

One option is to transfer all or part of that super fund to an account-based pension, which is a means of using some or all of your superannuation to provide you with a regular income when you retire or reach your preservation age. Preservation age is the age at which you can access your super and is between 55 and 60, depending on when you were born.

An account based pension can also be known by other names, such as an income stream or an allocated pension, depending on the provider. They account for about 78% of total pensions held, according to the Australian Prudential Regulation Authority.

The maximum you can transfer to an account-based pension has been capped since July 2017 and that was increased from $1.6 million to $1.7 million from 1 July 2021 for all new plans from that date.

If you already had an account-based pension before that date, the Australian Taxation Office (ATO) says you may be able to increase your capped amount to between $1.6 million and $1.7 million. You can check what figure applies to you by using the ATO online service via the myGov portal. You will need to set up a myGov account if you haven’t already done so.

When setting up an account-based pension, you can set the frequency of payments, known as drawdown, subject to a minimum amount that must be paid out each year. That minimum is calculated as a percentage of your fund and depends on your age.

The government has halved the amount for drawdown payments up to the financial year 2021–22 due to concerns over losses in financial markets as a result of the COVID19 crisis.

Regular payments will continue until the funds in the pension account run out. There is no maximum drawdown amount, subject to what funds are available, and you can take extra regular or lump-sum payments at any time.

What funds remain in the account are usually invested in a range of options to help grow the amount available for your retirement. Canstar’s Account-Based Pensions Outstanding Award and Star Ratings are designed to help you narrow your search for a product that offers excellent value.

Robyn Slater, from the National Seniors Financial Literacy Service, said several  factors should influence how much you withdraw from your fund.

“How much you withdraw each year, the returns on your investment and the amount of fees you pay will influence how long your super will last,” she said.

“It’s a moving feast that is influenced by your personal circumstances and market forces, so it’s worth getting professional advice when considering how much to withdraw.”

Are account-based pensions taxable?

If you’re aged between 55 to 59, then any money you receive from your account-based pension will be taxed at your marginal tax rate, less a 15% tax offset, according to Moneysmart. Payments you receive from aged 60 onwards are tax free.

Will you get the Age Pension if you have an account-based pension?

The amount of Age Pension from the federal government you’re entitled to is determined by several tests and an account-based pension forms part of the income and asset tests.

You are allowed to hold some assets and receive some funds without affecting your Age Pension payment, but if your situation puts you beyond the government thresholds, then you may see your Aged Pension payments reduced. It could be a wise idea to seek suitably qualified professional advice.

Pros and cons: what are the account-based pension rules

It’s important to look at the pros and cons when considering an account-based pension. The rules may vary among providers, so you need to consider things such as a minimum balance required, what fees may be charged and the past performance of any investment options.

Read carefully any product disclosure statements and compare different pension options for a range of providers.

You need to consider what impact an account-based pension may have on your eligibility for the Age Pension.

Moneysmart also warns that your investment earnings may be subject to market performance and could go down in value, and there’s no guarantee your super balance will last as long as you do.

Sub edited by Milan Cuk.

Cover image source: fizkes/Shutterstock.com

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This content was reviewed by Digital Editor Amanda Horswill as part of our fact-checking process.

Michael is a senior finance journalist at Canstar, specialising in superannuation, savings, wealth and life insurance. He is an award-winning journalist with more than three decades of experience. His work has featured on the BBC, the ABC, The Sunday Mail, The Courier-Mail and The Conversation.

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