Understanding account-based pensions
Once you decide to retire you can access your super as a lump sum or start an account-based pension (also known as an income stream) or do a combination of both. The benefit of starting an account-based pension is that it provides a regular tax-effective income during your retirement.
How does an account-based pension work?
An account-based pension works by simply transferring the money you have accumulated in your super to an account-based pension. This account will automatically pay you a regular income from your super into your bank account either fortnightly, monthly, quarterly or yearly.
The maximum you can transfer to an account-based pension is generally $1.6 million.
When can you start an account-based pension?
The income stream from an account-based pension can usually be paid to you once you’ve reached your preservation age and retired from work. In some circumstances, if you meet an alternative ‘condition of release such as permanent incapacity, or start a ‘transition to retirement’ pension you may be able to access your super before you retire.
Investing your pension
Your account-based pension account can hold a range of investments – including shares, fixed interest, cash and managed investments – depending on the investments offered by your fund.
Minimum pension payments
As legislated by the Government, every year you will need to withdraw a minimum pension payment. This is calculated according to your age. There is no maximum payment amount.
Tax benefits of account-based pensions
An account-based pension can be more tax-effective than taking your super as a lump sum. This is because the earnings from investments in your account-based pension are tax-free. These tax-free earnings remain in your account and increase the account balance.
Both lump sum and pension payments from your account-based pension are tax-free once you turn 60.
How long will your pension last?
How long your pension will last depends very much on what you want to do in retirement, how much super you have, how much you withdraw as a pension, the investment returns and the amount of fees. So, careful financial planning is important.
Using a transition to retirement pension before you retire
If you’ve reached your preservation age, you can generally access between 4 and 10% of your super balance each year even if you’re still working through a transition to retirement pension.
Unlike a full account-based pension, you can’t take a lump sum.
A transition to retirement strategy can be used in two ways:
- Reduce your working hours while maintaining the same income
- Save money by reducing your tax bill
A transition to retirement strategy could give you more time to save for retirement or to build additional emotional stability by allowing you to slowly ease into retirement.
What happens to your pension after you die?
An account-based pension can last for your lifetime, as long as your account holds enough money, and can be transferred to your beneficiary, (generally your spouse or partner), after you die.
To find out more about account-based pensions please contact us.