Account based pensions and transition to retirement pensions share the same base rules, but have some notable differences.
Overall, an account based pension provides greater flexibility and is more tax-effective than a transition to retirement (TTR) pension.
An account based pension is generally designed for individuals who have retired from the workforce, yet can remain an option in some circumstances for those still working.
A transition to retirement pension is for individuals who are still working and have not yet retired.
A more formal name for a transition to retirement pension is non-commutable account based pension.
There of a number of account based pension rules that are different compared to the transition to retirement pension rules.
Account Based Pension vs Transition to Retirement Pension
A comparison of account based pension vs transition to retirement pensions has been detailed below, as well as further explanation of the rules relating to each pension.
|Feature||Account Based Pension||Transition to Retirement|
|Commenced with Super Savings||Yes||Yes|
|Member required to have met preservation age||Yes||Yes|
|Member must meet retirement definition||Yes||No|
|Minimum Annual Pension Income Factor||Min Pension Standards||4%|
|Maximum Allowable Annual Pension Income||Account Balance (100%)||10%|
|Tax on Income Earnings||0%||15%|
|Tax on Realised Capital Gains||0%||15% (10% if asset owned for >12 months)|
|Lump Sum Commutations Allowed||Yes||No|
|Transfer Balance Cap Applies?||Yes||No|
As shown above, the account based pension rules slightly differ from the transition to retirement rules.
The account based pension is a more favourable income stream; however it requires more stringent conditions to be met before an individual is able to use their superannuation savings to commence one.
The main differences are the minimum and maximum income thresholds, the tax on earnings and the ability to make lump sum commutations.
Account Based Pension vs TTR Pension Differences
Detailed below are the transition to retirement rules compared to account based pension rules.
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Condition of Release
To have the ability to start an account based pension with superannuation savings, an individual must meet the superannuation definition of retirement, or be over age 65.
Commencing a transition to retirement pension only requires someone to have reached their superannuation preservation age. Their employment status is irrelevant.
Minimum Pension Income Standards
The minimum pension income required to be drawn by an account based member is based on a percentage of the account balance. The pension percentage factor is based on the member’s age.
While the same factors apply to transition to retirement pensions, a transition to retirement pension member will only ever be aged 55-64, because age 65 is a full condition of release, which effectively results in their transition to retirement pension converting to an account based pension.
The minimum pension factor for individuals aged 55-64 is 4%. Therefore, a transition to retirement pension will always have a minimum pension factor of 4%.
The minimum pension income calculated using the pension income factors is rounded to the nearest 10 whole dollars. If the result ends in an exact 5 dollars, it will be rounded up to the nearest 10 whole dollars.
Maximum Pension Income Standards
The annual maximum pension income factor of an account based pension is only limited by the balance of the pension. That is, the maximum pension income factor is 100%.
The maximum pension income factor for a transition to retirement income stream is 10% of the account balance each financial year.
Both the minimum and maximum pension income factors are calculated on the 1 July account balance each year and apply for the full financial year.
If an account based pension or transition to retirement pension commences part-way through a financial year, the minimum pension factor is calculated on a pro-rata basis determined by the number of days in the year remaining. The maximum allowable income of a transition to retirement pension is not pro-rata if started part-way through a financial year.
The minimum and maximum pension income standards for account based pensions vs transition to retirement (TTR) pensions are shown in the table below:
|Age of Member||ABP Min||ABP Max||TTR Min||TTR Max|
Tax on Earnings
All income and capital gains received from investments within an account based pension are received completely tax free.
All income and capital gains received from investments held within a transition to retirement pension are taxed at 15%. However, capital gains are effectively taxed at 10% if the asset sold was owned for longer than 12 months.
Lump Sum Commutations
A lump sum commutation is able to be made from the capital amount supporting an account based pension.
Lump sum commutations cannot be made from a transition to retirement pension; hence, the formal name of non-commutable account based pension.
However, all pensions can be commuted to be rolled back to accumulation phase.
Before starting an account-based pension, you should consider whether or not you would like it to be reversionary. This video can help you decide.
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Transfer Balance Cap
The Transfer Balance Cap restricts the amount of superannuation accumulation savings that can be transferred into an account based pension. The current Transfer Balance Cap is $1.7 million.
The reason for the cap is to limit the amount of funds an individual can hold in the tax-free pension environment.
The Transfer Balance Cap does not apply to transition to retirement income streams, due to all earnings being taxed in the same manner as an accumulation account.