What Is An Account Based Pension - Super Tips

Considering your super fund reaches its peak just as you retire, it makes sense that you would want to collect it gradually over time rather than all at once.

Your super fund reaches its peak just as you retire; this is when it's investing and generating returns from its largest possible sum. So it makes sense that you might want to collect it gradually over time (where it will continue to work for you) rather than all at once (where it may not be generating returns). This is called an ‘account-based pension’ and may be the secret to securing a comfortable retirement.

How does an account-based pension work?

An account-based pension works just like a normal income, but you are paid from your super instead of an employer. Most people choose to withdraw their super this way because it's both easier to manage and the fund can continue to make money for you as you go.

Tip: Your pension-based account may disqualify you for the government aged pension. Rest advice can help you understand the finer details here.

How do I open an account-based pension?

To access your super you need to meet a 'condition of release'. This can include when you have reached your preservation age and are fully retired; are over 65; or are permanently disabled.

Once you're qualified, you can convert your super account into an account-based pension just by contacting us over the phone [1]. This kicks-off a regular payment from your super in instalments of your choosing (monthly, half-yearly, annually). This payment is regulated based on age (with both maximum and minimum amounts), and any funds that may remain after you pass away will be transferred to a beneficiary [2].

Tip: If you have reached your preservation age but are yet to retire, you can only receive your super as pension payments using a transition to retirement (TTR) strategy. This is limited to a 10% pension limit and there are generally no commutations (like lump sum withdrawals).

How long does a pension-payment last?

An account-based pension is not guaranteed to last for any set period of time, it will just last as long as you have money in your account. How quickly it goes depends on how much you have to begin with, how much you withdraw each year, the investment returns you receive and the fees you pay.

Tip: Try our superannuation calculator for a sense of how much you will need to retire comfortably.

What are the benefits of an account-based pension?

You do not pay tax on any earnings generated by your super fund (note the retirement phase income stream is limited to a cap of $1.6m — the transfer balance cap in 2018-19)
You do not pay tax on pension payments after the age of 60
For eligible members aged 55-59, the taxable portion of your account-based pension is taxed at the marginal rate with a 15% tax offset
You can vary the payments (monthly, quarterly, half-yearly or annually) subject to minimum and maximum restrictions
Follows the same investment strategy as an accumulation fund
There may be money left over for your estate.

Are there downsides to an account-based pension?

Your investment earnings are not guaranteed and may fluctuate in line with market performance
There's no guarantee your pension will last as long as you do
Money left over for estate may be liable for additional taxes

Account-based pensions can be a good choice if you want a regular, flexible and tax-effective income, but they do not guarantee an income for life.

Rest can help provide advice on whether an account-based pension is right for you or simply on how to maximise your savings in the lead-up. Get in touch with us today.

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