What is an Account Based Pension in Australia?
An Account Based pension is an income stream that is paid to you from your superannuation, as a way of funding your retirement so you have money when you stop working.
You can potentially start to access this money when you reach ‘preservation age’. The following is a summary of the different preservation ages based on year of birth:
· Born before 1 July 1960 – Preservation age is 55
· 1 July 1960 – 30 June 1961 – Age 56
· 1 July 1961 – 30 June 1962 – Age 57
· 1 July 1962 – 30 June 1963 – Age 58
· 1 July 1963 – 30 June 1964 – Age 59
· Born after 30 June 1964 – Age 60
An Account Based Pension differs from the Age Pension because it is your own money rather than funds from the Government.
Why Choose an Account Based Pension?
You may decide to arrange an Account Based pension in retirement for the following reasons:
There is no tax on earnings within the account and if you are over age 60 then you won’t pay tax on the pension payments you receive– this will depend on the type of account you have and how the money within your fund is allocated.
You can use your Account Based pension to top up other forms of income such as the age pension (although conditions apply).
You can potentially choose weekly, fortnightly monthly, quarterly, half-yearly or annual payments. This will depend upon your Account Based pension provider.
The funds within the pension account can be invested to your liking in either conservative or growth investments or a combination of the two depending on how much risk you would like to take.
You can nominate various beneficiaries on your Account Based pension account – different taxation treatment will be applied to different people depending on their association with the account holder.
For the 2023-24 financial year, the minimum drawdown rate starts at 4 per cent for individuals aged between 55 and 64. It increases gradually from there based on age.
As you withdraw money from your Account Based pension, the balance of your superannuation may drop if the returns are not outpacing your withdrawals. As a result, you may find it runs out as you enter old age.
If You’re Still Working
There is also something called a ‘transition to retirement’ (TTR) pension, which you can claim when you begin to drop back from work and reduce your hours. The tax treatment of earnings within a TTR pension are the same as if your funds were held in accumulation phase, and the maximum you can withdraw from the account during the year is 10%.
Can I access an Account Based pension as well as the Age Pension from Centrelink?
Access to an Account Based pension and the Age Pension have different qualifying criteria. In terms of qualifying for the Government age pension, this is means tested by either the value of assets you have or the income you earn.
How to Arrange an Account Based Pension
The first thing you need to do to arrange an Account Based pension is to speak to a financial planner. They can help you better understand your options, so you get the best outcome for your retirement.
If you would like to understand your options to commence an account-based pension, please don’t hesitate to contact our office to speak with one of our dedicated financial advisers.
Disclaimer: The information contained in this news post is general in nature and is intended to provide a general summary only and should not be relied on as a substitute for professional advice. Whilst the information is considered to be true and correct at the date of publication, changes in circumstances after the time of publication may impact upon the accuracy of the information.