Making sense of account-based pensions

An account-based pension allows you to draw a regular income from your superannuation savings when you retire. Check out the pros and cons.

You may have heard about an account-based pension (or allocated pension) as one of the options available if you’re looking to receive a regular income in the years after you finish working.

If it’s something you’ve been thinking about, we answer some of the commonly asked questions to help you navigate your way.

What is an account-based pension?

An account-based pension is an account made up of money you’ve accumulated in super, which allows you to draw a regular income once you retire.

Typically, you can access your super once you’ve reached your preservation age and you retire, which will be between 55 and 60 depending on when you were born.

Because an account-based pension is made up of the money you’ve saved in super, which could differ from person to person, it doesn’t guarantee an income for life.

If you’d like an idea of how much you’ll have in retirement and how long your retirement savings might last, our online retirement simulator tool can help you crunch the numbers.

Am I restricted to how much I can withdraw?

Typically, there’s no limit to how much you can withdraw from an account-based pension, which means in addition to receiving periodic payments, you can withdraw some or all your money as a lump sum.

Each year however, you’ll need to withdraw a minimum amount. This figure is calculated based on your age and will be a percentage of your account balance.

The table below shows you just how much.

Age  Yearly minimum withdrawal
55 - 64 4%
65 - 74 5%
75 - 79 6%
80 - 84 7%
85 - 89 9%
90 - 94 11%
95+ 14%

Is there a limit on how much I can transfer?

If you’re converting your super into an account-based pension to derive an income in retirement, you’re restricted to transferring a maximum of $1.6 million into your pension account, not including subsequent earnings.

If you already have a balance above that, the excess must be placed back into the super accumulation phase (where earnings will be taxed at the concessional rate of 15%), or taken out of super completely to avoid potential penalties.

Also note, if you transfer $1.6 million into an account-based pension, even if your balance reduces over time, you won’t be able to top up your pension a second time.

What taxes will I pay?

  • Generally, you will not pay tax on investment earnings
  • If you’re between the ages of 55 and 60, the taxable portion of your account-based pension payments will be taxed at your personal income tax rate less a 15% tax offset
  • From age 60 you will not pay tax on pension payments you receive
  • If you transfer more than $1.6 million or have more than that amount in your account-based pension, additional taxes and penalties may apply.

Remember, whether an account-based pension is tax effective will depend on your circumstances, so it’s important to ensure you’re across any tax implications before making a decision.

What about investment control?

With an account-based pension, you can generally choose from a range of investment options, and an investment manager will make the day-to-day investment decisions.

Note, a broader range of investments may be available depending on the type of fund you have and that returns from an account-based pension are tied to movements in investment markets.

Can I still receive the Age Pension?

It is possible to have an account-based pension and receive the government’s Age Pension.

The value of various assets you have, and any income you receive, will determine whether you’re eligible and what amount you’ll receive in Age Pension payments.

Because account-based pensions are generally subject to the deeming rules (which are used to assess income from financial assets), account-based pensions are assumed to earn a certain rate of income regardless of how much income is actually generated, or how much you receive in payments.

The benefit of this is when Centrelink assesses eligibility (for Age Pension payments and other benefits), the level of income received from the account-based pension may be higher than the amount that is classified ‘assessable income’ under the income test.

Do I have other options?

  • Access a portion of super via a transition to retirement income stream – This will allow you to withdraw periodic payments from your super savings (no lump sums) and you can do so while remaining in the workforce. This can make up for a reduction in wages if you’re reducing your work hours, however different withdrawal limits apply and note TTRs lost their tax exemption on 1 July 2017. For more information, read – How do transition to retirement income streams work?
  • Take some or all of your super as a lump sum – This may be tempting, but it won’t be the best option for everyone and there may be tax implications to consider. You should think about how you plan to spend or invest this money, and what you’ll live on if you have minimal or no super left. To find out more, read – Should I take my super as a lump sum?
  • Purchase an annuity with super and/or ordinary savings - Annuities generally pay a guaranteed series of payments over an agreed period of time. You will however be sacrificing some flexibility as you cannot easily make lump sum withdrawals and life expectancy is also a major consideration. For more details, read – What’s an annuity?

Where to go for more information

For further assistance, around whether an account-based pension may be right for you, speak to your adviser or if you need help finding one, call us on 131 267 or use our find an adviser tool.

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© AMP Life Limited. This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.