Confused? ... Top 10 Facts About Account Based Pensions
As retirement moves closer into focus, you might start to give a thought towards the options available to you. Especially, in terms of utilising the accumulated wealth inside of super, to fund your retirement lifestyle.
It’s important to understand that there are several options available to you; for example, depending on your personal circumstances, you can choose to take your super benefits as:
- a lump sum,
- an income stream,
- or a combination of both.
Briefly, those that choose to take their super benefits as a lump sum, can often do so for one or a combination of reasons. This is highlighted by the information available* on what these lump sums are reportedly used for:
For example, to:
- invest the money elsewhere/personal savings/bank,
- pay off home/pay for home improvements/buy new home,
- or roll it over/invest it in an approved deposit fund/deferred annuity or other super scheme.
Despite the above, most of us chose the third option*, namely, we take our super benefits as an income stream, whilst also taking a small proportion of our super benefits as a lump sum (once or every so often).
This brings us to a specific type of income stream, an account based income stream, which is also referred to as an account based pension.
Account based income streams can be provided by self-managed super funds, public offer (retail) super funds, and certain employer and industry super funds.
Please note: For the purposes of this article, we are referring to retirement phase account based income streams; rather than transition to retirement income streams, which are generally non commutable (i.e. provide income only and no ability to cash out a lump sum).
With the above in mind, here are the top 10 facts about account based income streams:
1. For retirement purposes, to be eligible to commence an account based income stream, you must meet a condition of release, such as:
- attaining age 65,
- termination of an employment arrangement after reaching age 60,
- or permanent retirement after reaching preservation age. Your preservation age is determined by your date of birth.
2. To commence an account based income stream, you will need to transfer your super benefits to a retirement income stream.
3. A limit applies to the amount of super benefits that you can transfer to retirement (pension) phase, to support an account based income stream; referred to as the transfer balance cap. Which is currently set at $1.6 million (indexed) per person.
Please note: If you only use a portion of the transfer balance cap, the unused portion will be indexed. The transfer balance cap does not apply to any subsequent growth or losses.
4. Contributions or rollovers, can’t be made to an account based income stream once it has been commenced; regardless of whether the amount within the account based income stream drops below the transfer balance cap.
5. Investment income and capital gains from the assets supporting an account based income stream are exempt from taxation.
6. An account based income stream allows income payments and lump withdrawals, with no restrictions on the maximum amount able to be paid or withdrawn. However, there is a minimum annual income payment amount, also referred to as a minimum percentage drawdown; which you must receive.
Please note: Lump sum withdrawals don’t count towards this minimal annual income payment amount.
7. Income payments from an account based income stream must be received once per financial year, (except for the first financial year if you commence the income stream in June). You can elect to receive your income payments fortnightly, monthly, quarterly, half-yearly, or yearly.
8. Income payments received from an account based income stream will be tax-free to you, if you are aged 60 or over at the time of receiving the pension payment. Similarly, lump sum withdrawals from age 60, can also be paid to you tax-free.
9. Upon commencing an account based income stream, you can elect to have the income stream transferred and income payments continue to be paid to an eligible dependant following your passing. This is referred to as a reversionary beneficiary nomination.
10. Investment returns, the income payments amount you choose to be paid, and any lump sum withdrawals you choose to make will ultimately determine the length of time that an account based income stream lasts.
If you have any questions regarding this article, please do not hesitate to contact us.
*Australian Government, Productivity Commission. (2015). Superannuation Policy for Post-Retirement.
As always, here's a lovely general disclaimer .... This article has been provided for general education purposes only. The content does not take into account your personal objectives, financial situation or needs. You should consider taking financial advice tailored to your personal circumstances.