An account-based pension is the most common and flexible type of superannuation retirement income stream. While many people wait until retirement before starting an account-based pension, it can often be more favourable to commence an account based pension as soon as possible. Read on to find out how and why.
What is an Account-Based Pension?
An account-based pension is a flexible retirement income stream, started with superannuation accumulation savings, that allows you to receive pension income suitable for your needs, subject to a minimum income requirement each financial year.
Account-Based Pension Minimum Withdrawal
The minimum pension income that you must receive from your account-based pension is based on your age and calculated by multiplying your pension percentage factor by your account balance at the beginning of each financial year.
Your minimum pension percentage factor is shown in the table below:
|Age||Standard Minimum Percentage Factor||Reduced Minimum Percentage Factor (2020 - 2023 FY inclusive)|
|Below Age 65||4%||2%|
|65 - 74||5%||2.50%|
|75 - 79||6%||3%|
|80 - 84||7%||3.50%|
|85 - 89||9%||4.50%|
|90 - 94||11%||5.50%|
|Age 95 and above||14%||7%|
The calculated amount is rounded to the nearest whole ten dollars.
If you start a pension part way through a financial year, the minimum dollar amount is pro-rata, based on the number of days remaining in the financial year, divided by the total number of days in the financial year.
Do I Pay Tax on My Account-Based Pension?
Paying tax on your account based pension income will depend on whether you are over or under age 60. There is also tax on superannuation earnings to consider. Let’s take a look at both.
Is Account-Based Pension Income Taxable?
Account-based pension income is received tax-free if you are aged 60 or over.
If you are under age 60, account-based pension income may be taxable. Specifically, your account-based pension balance consists of both taxable and tax-free components. All pension income must be received proportionality from each component. The tax-free component portion is received tax-free and the taxable component portion is taxed at your marginal tax rate, minus a 15% tax offset.
Are Account-Based Pension Earnings Taxable?
Account-based pension investment earnings are not taxable. All investment earnings, including realised capital gains, are received completely tax free within an account-based pension.
Once you commence an account-based pension, your balance is invested in whichever way you see fit, subject to the investment options available through your superannuation pension provider. The tax rate on account-based pension earnings is 0%.
Read more: When Can I Access My Super Tax Free?
Does an Account-Based Pension Affect Age Pension?
Yes, once you use your super to commence an account-based pension, the total balance is assessed for Centrelink Age Pension purposes, even if you are under Age Pension age.
The superannuation pension balance is assessed under both the Centrelink Income Test and the Assets Test for you and your spouse (if relevant).
Under the Assets Test, the full balance is assessed as an investment asset. Under the income test, the full balance is deemed under the Centrelink deeming rules.
If you commenced the account-based pension prior to 1 January 2015 and have been in receipt of continuous Centrelink entitlements since such time, the income will be assessed under the grandfathering provisions using the Centrelink deductible amount formula.
Difference Between Allocated Pension and Account-Based Pension
There is no difference between an allocated pension and an account-based pension. It is simply different terminology to explain the same thing. The term account-based pension came into existence as part of the Simple Super reforms in 2007. The equivalent superannuation income stream prior to this date was allocated pension, hence the interchangeability of terminology.
Difference Between Annuity and Account-Based Pension?
The difference between an annuity and an account based pension is the guaranteed nature of an annuity compared with the flexibility of an account-based pension.
When you purchase an annuity, the annuity provider guarantees to provide you with a pre-agreed income amount for a predetermined time frame. The income amount is constant, but may include CPI increases, and is unaffected by investment markets. Lump sum withdrawals from an annuity are generally not permitted.
Conversely, an account-based pension is a flexible income stream that allows you to withdraw as much income as you like (up to the account balance), subject to a minimum legislated requirement. The minimum percentage amount is based on your age. Lump sum withdrawals are also permitted.
Unlike an annuity, an account-based pension does not guarantee to provide you with an income stream for a predetermined time frame. Instead, the longevity of an account based pension is determined by your level of withdrawals and the investment earnings within the account. Once the account balance reaches $0, no further pension payments will be received.
Can I Start an Account-Based Pension?
You can start an account-based pension as soon as you have satisfied the definition of a full superannuation condition of release. A superannuation condition of release is satisfied when one of the following occurs:
- You have attained your superannuation preservation age and are retired with no intention of returning to full-time or part-time work ever again;
- After attaining age 60, you had an employment arrangement come to an end; or
- You have reached age 65.
If you have had any of these occur, you can access your super and start an account-based pension.
There are also instances where you can start an account-based pension where you have suffered a total and permanent disability.
Who Can Open an Account-Based Pension?
Anyone who has satisfied a full superannuation condition of release can open an account-based pension. You generally need to be an Australian citizen or resident to open an account based pension, but this will be based on the rules associated with your specific superannuation fund.
How Do I Commence an Account-Based Pension?
You commence an account-based pension by completing the application form with your preferred account-based pension provider. Most superannuation funds will offer account-based pensions, which may be referred to as income stream accounts, retirement accounts, or something similar.
During the application process, you will include details such as:
- where the funds will be coming from to start the pension,
- how you would like the pension balance invested,
- how much income you would like to receive and the frequency; as well as
- who the beneficiaries of the account will be if you were to pass away.
Should I Commence an Account-Based Pension?
Whether you should commence an account-based pension, or not, is based on your specific situation and what you would like to achieve. There are a number of things to consider prior to starting an account-based pension, such as when it should be commenced and how it should be invested, to name a few.
It can often be beneficial to commence an account-based pension even if you are still working, or intend on returning to work, due to the associated tax benefits.
It’s important to get personal financial advice prior to making any decisions regarding your super and retirement income streams. While it is possible to manage your own retirement plan, a DIY approach often results in costly mistakes and retirement plans are rarely optimised.
Our financial planning firm, Toro Wealth, specialises solely in helping 50 to 70 year-olds optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.
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