Account-based pensions (you’ll sometimes hear them called allocated pensions or retirement income streams) can be a great way to use your superannuation savings to create a retirement income.
If you’re a novice when it comes to these products, you might want to get a quick run-down on the basics.
Once you’ve done that, you’ll be ready to dig into the detail, so let’s open the bonnet and see how these account-based pensions actually work.
You can only start an account-based pension with superannuation savings; if the bulk of your savings are held elsewhere, you’ll need to locate your existing superannuation account and make a contribution to it.
But that can be a great strategy because, according to Gemma Pinnell, Industry Super Australia’s director of strategic engagement, investing in an account-based pension can be one of the best ways to make your savings last longer even as you draw down an income from it.
“By choosing to use an account-based pension for your retirement income stream, your super balance can continue to grow even after you’ve retired, as it remains invested,” she explains.
That’s important, because many of today’s retirees will still be healthy and active well into their 90s – and possibly beyond! “As we start living longer and longer, it’s important for our super balances to have longevity and not dwindle down too soon,” Pinnell notes.
Once you’ve contributed to your ‘accumulation’ super account that you hold with your super fund, you can ask your fund to set up an account-based pension for you, which requires transferring some of the money from your accumulation account to an account from which you will draw down an income.
That can be done as soon as you hit your preservation age, which depends on the year you were born. You can easily find out your own preservation age by entering your year of birth into Industry SuperFunds’ online tool.
If you’ve been getting a regular weekly or monthly paycheque, it can be tough to adjust to a retirement in which you don’t have a regular income. Fortunately, once you’ve opened your account-based pension, you can decide how often you’d like to be paid.
Depending on your fund (Industry SuperFunds can give you a wide range of options), you might decide to be paid weekly, twice a month or monthly. If your circumstances change, you can alter the frequency of payments.
If you find you need a lump sum, perhaps to update your car or undertake renovations, it’s not a problem for account-based pension-holders because you can make a larger withdrawal at any time.
The income payments you receive from your account-based pension aren’t taxed, but if you make a very large withdrawal, you may be liable for tax on that sum. The current threshold is $195,000, with any lump sum withdrawal above that amount taxable.
Pinnell says each super fund has a different minimum amount required to open an account-based pension, but Industry SuperFunds can help people even if they have a low balance.
An Industry SuperFund member, for example, who retired with $50,000 in super could use their account-based pension to top up their Age Pension; an income boost that could come in handy for funding a holiday each year.
If you’ve got a lower balance, there’s help available as well, with some Industry SuperFunds helping you generate a regular income from just $10,000.
Because account-based pensions are so flexible, you can pick your own regular pension amount – with some restrictions. Account-based pensions are designed so the balance can grow in the early years of retirement, allowing you to draw more money down over time.
You’ll need to take a minimum amount each year, with the percentage of your total super balance (the amount in your account-based pension and the amount that remains invested) that must be taken as a minimum changing depending on your age. The ATO sets out the minimum amounts in detail.
For example, someone who is 70 and has a super account balance of $100,000 would need to take a pension of at least 5 percent, or $5,000, each year. Of course, they can decide to take a higher amount, and they can still make extra withdrawals at any time.
There’s no paperwork required to get your regular payment from your account-based pension account; just like a regular salary, it’s paid directly into your bank account.
Most retirees will qualify for at least a part-Age Pension when they reach pension age, and account-based pensions are designed to work alongside the Age Pension.
Although the full balance of your account is taken into account under the pension assets test, your regular income isn’t.
Instead of assessing your account-based pension payments as income, Centrelink applies deeming rates to the balance of your account. Deeming is a set of rules the government uses to work out what income may be created from your financial assets, but it assumes these assets earn a set rate of income rather than calculating what they really earn.
As a result, it’s likely your account-based pension payments will be much higher than the income assessed by Centrelink using its deeming rates.
Pinnell says that means account-based pensions can help get the best Age Pension outcomes possible. “A good financial advisor will help you maximise your income with financial longevity in mind,” she adds.
Leaving an inheritance is a high priority for many retirees, and unlike some types of annuities that can have no residual value when you die, an account-based pension can help you do that.
Because you can make a withdrawal at any time, as long as you have sufficient funds in superannuation, you have the opportunity to provide your family with financial assistance at times when they need it.
And although it’s likely your account balance will reduce over time (because as you age, the government’s rules on minimum drawdowns require that you draw a larger percentage of your super balance as income), your money isn’t lost when you die.
If you’ve nominated a beneficiary to your fund, that’s where the remaining account balance will be paid. If there’s no nomination, the trustees of the fund will usually pay the balance to your estate.
An account-based pension might be the best option to help fund your retirement, but it’s wise to discuss your options with a professional advisor, especially if you hope to maximise your Age Pension entitlement. Industry SuperFund members can speak to a qualified advisor at no cost by contacting their super fund.