What is an account based pension and why should I care?

One day you’ll be ready to retire (whatever that may look like)

The idea is then you can slow down (or stop) working and spend more time doing the things you enjoy. But what are your options when it comes time to access your super?

How will you be using your superannuation balance? Lump-sum or regular income stream - or a combination of both?

Until then, many of us are also taking an active interest in our elderly parent's financial position in their retirement.  Many of us are either the paperwork or financial backup, so it pays to have an idea of what they’re working with too.

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When its time to spend your super

Once you decide its time for you to retire (and you have reached your preservation age)  you can access your super as either;

• a lump-sum payment, or
• start an account-based pension (also known as an income stream), or
• a combination of both

The benefit of starting an account-based pension (ABP) is 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 account to an account-based pension account.

• This ABP account will then automatically drip feed a set amount of money to you as a regular payment either fortnightly, monthly, quarterly or yearly.

The maximum you can transfer to an account-based pension, in today's tax law, 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 only when you've reached your preservation age and retired from work.

In some circumstances, if you meet an alternative ‘condition of relief’ such as permanent incapacity, or start a ‘transition to retirement’ pension (see below) you may be able to access your super before you retire.

How to calculate your preservation age

Minimum pension payments you will need to make to yourself

The current government laws require you to withdraw a minimum pension payment out of your ABP each year. This action is usually referred to as a 'drawdown'.

• This is the minimum amount 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 account-based 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 you pay on your account

So, careful financial planning and good advice is important.

To work out your approximate level of income in retirement (and how long it will last using your current circumstances as a base), why not visit the Government’s Moneysmart retirement planner calculator.

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.

Pro Tip: 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 by keeping you in the workforce longer 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.

Types of beneficiaries

There are three types of beneficiaries you can nominate for your ABP.

1. non-binding
2. binding, and
3. reversionary

If you nominate a reversionary beneficiary the nominated person will automatically continue to receive the pension after your death.

Advantages of receiving a reversionary pension

• There is no urgency to deal with death benefits at a time of grief as the pension automatically switches from you to your reversionary beneficiary.
• Generally, the pension continues to be tax-free for your beneficiary, or at least concessionally taxed.
• Earnings are tax-free in the fund.
• The pension remains in the super environment. In contrast, by receiving a death benefit as a lump sum (through a binding or non-binding death benefit nomination) some beneficiaries would not be able to contribute that money back into super due to age restrictions.

Make plans for your retirement

Retirement can and should be a rewarding and enjoyable phase of your life.

But it's also a new part of life for many older people who are simply new to financial advice and taking greater personal responsibility for their own futures.

When you, or someone you know, needs help thinking through an account-based pension, strike up a conversation with us.

Drew Browne is a specialty Financial Risk Advisor working with Small Business Owners & their Families, Dual Income Professional Couples, and diverse families. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His business Sapience Financial Group is committed to using business solutions for good in the community. In 2015 he was certified as a B Corp., and in 2017 was recognised in the inaugural Australian National Businesses of Tomorrow Awards. Today he advises Small Business Owners and their families, on how to protect themselves, from their businesses.  He writes for successful Small Business Owners and Industry publications. You can read his Modern Small Business Leadership Blog here. You can connect with him on LinkedIn.  Any information provided is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance.