You might have read about account-based pensions, or heard about allocated pensions, account-based retirement income streams or flexible superannuation pensions. This might have left you wondering, what’s the difference between them all?
Let’s make it simple; they’re all the same. We’re going to call them account-based pensions, because they’re just a pension, or regular income, paid from your super account.
Even though there are a few rules and restrictions covering account-based pensions, they’re easy to understand and perfect for many retirees. According to Gemma Pinnell, Industry Super Australia’s director of strategic engagement, most retirees are looking for a regular income, and an account-based pension fits the bill.
“Rather than coming from an employer, the money comes from an account within your superannuation fund, while the rest of your super balance remains invested,” she explains.
Pinnell says that by keeping your superannuation invested after you’ve retired, your money may continue to grow, even though you’re drawing a regular income from it. (Of course, this investment growth depends on the type of fund your super savings are invested in and how those underlying investments perform.)
There’s an added bonus, too. “Income streams can also offer tax benefits,” she notes.
While you’re still working, the earnings on your super are generally taxed at a rate of 15 percent, which is usually a much lower rate than your marginal tax rate. That makes super a very tax-efficient investment.
But once you turn 60, the earnings of an account-based pension aren’t taxed at all, nor are the regular payments you receive from it as income. Plus, your savings aren’t locked away; you can make withdrawals at any time.
Pinnell says this flexibility gives account-based pensions an edge over other common retirement income-producing products, such as annuities or term deposits.
“Many people consider term deposits,” Pinnell says of the various income products. “However, these don’t offer the same tax benefits as using an account-based pension with your super fund.”
Meanwhile, compared to term deposits and other fixed-interest products, which are paying record-low interest rates, the returns from account-based pensions can be highly attractive.
“If your money is with an Industry SuperFund, you can also rest assured that your fund is investing purely for its members and that none of the profits are going to shareholders,” Pinnell adds. “You’ll also find they have lower fees and stronger historical long-term investment performance on average than products offered by bank or retail funds.”
There’s no catch, but there are a few rules and regulations. Before you can start an account-based pension you’ll need to meet a ‘condition of release’, which usually requires that you’re aged over 60 and retired.
Depending on your fund, you’ll need to invest a minimum amount; some funds have a $50,000 minimum, while others can get you started for much less.
And while you can choose how much you want to be paid as a pension, there are age-based minimum levels set by the government. For example, a 70-year-old must draw at least 5 percent of their super account balance as a pension each year. The Australian Taxation Office (ATO) sets out in detail the minimum annual payments required for various age groups.
Of course, you’ve still got access to your money, so you can make withdrawals on top of your regular pension drawdowns at any time.
When you pass away, your money’s not lost; the remaining balance of super savings in your fund is paid to your nominated beneficiary or your estate.
Even a relatively low balance of $50,000 can produce an income stream from an account-based pension.
“For people with low balances, choosing to receive an income stream rather than taking a lump sum could be a great idea,” Pinnell says. “That way they can maximise the amount of Age Pension they receive from the government, while the amount remaining in their superannuation balance can be invested.”
Account-based pensions are also treated kindly when it comes to the Age Pension income test, with ‘deemed income’ calculated on the account balance. This means the actual pension paid to you as income isn’t assessed. That’s one of the reasons a lot of retirees find account-based pensions an ideal way to top up their regular Age Pension payments.
How much income will I need?
That’s the perennial question for retirees, but the answer isn’t too difficult to work out.
Industry SuperFunds has a handy retirement needs calculator which can help you work out what your perfect retirement will cost.
As well as using the calculator, many pre-retirees do a careful check of their incomings and outgoings, then adjust those numbers to reflect what they expect to be the reality in retirement, to double-check that the calculated sum matches their lifestyle expectations.
You can then use the retirement balance calculator created by Industry SuperFunds to see if you’re on track, and how making extra contributions could make a big difference to your final balance.
If you’re worried you’re going to fall short, there are a number of ways you can boost your super balance even in the years immediately prior to retirement, including by reviewing your fund’s performance, checking whether you’re paying high fees on your fund, making concessional catch-up contributions and taking advantage of the new downsizing rule that allows you to make a one-off contribution of up to $300,000 to your super fund from the proceeds of the sale of your home.
Also, don’t forget that most Australians still qualify for either a part or full Age Pension and its various benefits to help support them when they reach pension age.
If you need a helping hand, then why not get some professional advice? All Industry SuperFunds have qualified advisers who can help you free of charge. Contact your industry fund to make an appointment with one of their in-house retirement income planning experts.
What financial product did you choose to create your retirement income? Are you satisfied with your choice?