Account Based Pensions
By Colin Lewis, Head of Strategic Advice, Fitzpatricks Private Wealth
Ten things you need to know about account-based pensions
If you’re retiring – or have suffered total and permanent disability – taking your super as an account-based pension could be one of the smartest things you do where you don’t need a lump sum to say pay off the mortgage, fund renovations, replace an aging car or go that well deserved holiday.
Here are ten things you should know about the most common type of superannuation income stream.
1. When can I start an account-based pension?
To commence an account-based pension, you must meet a ‘condition of release’ (COR).
Most people need to retire after their preservation age to access their benefits, but you may access your super before this in certain circumstances – such as permanent incapacity, terminal illness, reaching preservation age and starting a transition-to-retirement (TTR) income stream.
If you’re 60 to 64, retirement for superannuation purposes occurs when you cease an employment arrangement – even if you intend to work again.
You can get your super at 65 even if you’re still working.
So, once you’ve met a COR, you can turn some or all of your super into an account-based pension to receive regular income.
2. How much can I drawdown?
An account-based pension is a flexible income stream that allows you to receive as much pension income as you like (up to the account balance), provided you draw a minimum amount each year, based on your age.
The minimum annual payment is four per cent of the account balance for people under age 65, five per cent for people aged 65 to 74, progressively rising to 14 per cent for those aged 95 or more.
3. How flexible are account-based pensions?
Account-based pensions are the most flexible type of superannuation income stream.
You decide how much to transfer into it (subject to a cap) and choose the payment arrangement that suits you, i.e. the size (subject to the minimum) and frequency of pension payments – fortnightly, monthly, quarterly, half-yearly or annually.
You select the underlying investment(s) to support your pension.
Lump sum withdrawals can be made, and you can stop the pension, at any time.
So, if unexpected expenses come up, or you’d like to make a major purchase like a car or a holiday, you just take more out.
4. How much super can I move into an account-based pension?
The transfer balance cap (TBC) limits the amount you can move into retirement phase and/or receive as a death benefit pension on death of say your spouse.
It doesn’t apply to TTR pensions unless they move into retirement phase.
So, if you’re starting an account-based pension for the first time, your TBC will be $1.9 million, provided you haven’t received a death benefit pension or another type of retirement phase income stream, e.g. defined benefit pension.
Otherwise, your personal TBC will be somewhere between $1.6 and $1.9 million – you can view your cap in MyGov.
Super in excess of this cap can be retained in accumulation phase.
5. How are account-based pensions taxed?
Account-based pensions are extremely tax-effective.
In accumulation phase, fund earnings including capital gains are taxed at 15 per cent – a one-third discount applies to capital gains on assets held for more than 12 months.
But when you commence a pension and move into retirement phase, it’s all tax-free. Together with pension payments from age 60 being tax-free (from taxed funds), you cannot get better than this.
If you are between preservation age and age 60, or you’re permanently disabled, the taxable portion of your payment receives a 15 per cent tax offset (from taxed funds).
6. How should I invest?
Just because you retire doesn’t mean you have to become overly conservative in your investment outlook.
With average life expectancies well into the eighties, investing conservatively could mean missing out on a number of investment cycles that may result in higher returns.
If you invest in growth assets, e.g. shares, property, pre-mixed investment options (balanced, growth, high growth), ensure you have enough in liquid assets – cash, term deposits and fixed income securities – to meet the first two to three years’ worth of pension payments.
Then, if there’s a market downturn early in the life of your pension, your fund will not be forced to sell down growth assets at depressed prices to meet your pension payments.
Also, you can afford to be a little more aggressive with investing knowing there’s the safety net of the Age Pension.
7. How does an account-based pension impact Centrelink entitlements?
Super in accumulation phase is not means tested until Age Pension age.
Whereas an account-based pension is means tested at any age for you and your spouse (if relevant).
The full balance is assessed as a financial asset under the assets test and is deemed using Centrelink’s deeming rules under the income test.
8. How do I choose an account-based pension provider?
In choosing a super fund that best suits your circumstances and maximises your retirement savings, consider its features and benefits, administration fees, investment options and performance.
The right one will have competitive fees and strong long-term returns – although past performance is no guarantee of future results.
Minor differences in fees can add up.
If you’re happy with your current fund and it provides an account-based pension with the features you want, then stick with it – don’t get stuck in a fund that ultimately costs you your lifestyle.
9. How long will it last?
How long an account-based pension lasts depends on several factors – the amount of super you transfer into it, how much you drawdown each year, the performance of the underlying investments and how much you pay in fees.
You bare longevity risk with an account-based pension. There’s no guarantee it will last as long as you do – when money in the pension account is exhausted, your income and pension ceases.
If you’re after a retirement product that keeps providing income until you die – guaranteed income for life – you may need a lifetime annuity.
10. What happens to my account-based pension after I die?
Money left in your pension account when you die will go to your eligible beneficiaries or your estate – you nominate where it goes.
There are different tax implications depending on who you leave your money to.
If you nominate a ‘reversionary’ beneficiary, the pension does not cease, and pension payments automatically continue to be made to your eligible dependant until the pension account runs out. They have the flexibility to commute some or all of the pension to a lump sum.
If you don’t have a ‘reversionary’ beneficiary, the pension will cease, and your nominated dependant may then take the resulting death benefit as a lump sum or new income stream.
A non-tax dependant beneficiary, e.g. adult child, must take your super as a lump sum.
Where a child receives a death benefit pension, they must withdraw it as a tax-free lump sum no later than their 25th birthday, unless they suffer from a disability.
An account-based pension offers regular, flexible and tax-effective income from your super to help fund your retirement.