Understanding account-based pensions
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?
An account-based pension works by simply transferring the money you have accumulated in your super to an account-based pension. This account will automatically pay you a regular income from your super into your bank account either fortnightly, monthly, quarterly or yearly.
The maximum you can transfer to an account-based pension is generally $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 retired from work. In some circumstances, if you meet an alternative ‘condition of relief’ such as permanent incapacity, or start a ‘transition to retirement’ pension (see below) you may be able to access your super before you retire.
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 Coronavirus situation.
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 tax-free. These tax-free earnings remain in your account and increase the account balance.
Both lump sum and pension payments from your account-based pension are tax-free 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.
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 Retirement, a new stage of life
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 tax-free for your beneficiary, or at least concessionally taxed.
- Earnings are tax-free 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.
More information on Non-binding and binding nominations
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 available to you through your super account or contact us and we can help.