How you can access your super via different types of pensions, and how these differ to the government's Age Pension.

If you’re retirement planning and wondering how you can access your super via different types of retirement pensions, how these differ to the government's Age Pension, and what you should know if you’re considering withdrawing your super as a lump sum, it’s a good idea to get across the information below.

Keep in mind that to access your super, you generally need to have reached your preservation age (which will be between 55 and 60, depending on when you were born).

Below, we walk you through the main types of retirement and superannuation pensions available in Australia and what you need to think about before deciding whether to take your super as a lump sum:

  • Transition to retirement (TTR) pensions
  • Account-based pensions
  • Annuities
  • The government’s Age Pension
  • Withdrawing super as a lump sum

Transition to retirement (TTR) pension

A transition to retirement (TTR) pension (or income stream) enables you to access some of the super you’ve saved via regular payments once you reach your preservation age, even if you’re receiving an income from your employer or business.

Having access to this type of pension could provide you with greater financial flexibility, as you can periodically withdraw money from your super while continuing to work full-time, part-time or casually.


Are there withdrawal limits?

You can only withdraw between 2% and 10% of your super savings as pension payments each financial year in 2019/2020 and 2020/21. You can’t make lump-sum withdrawals unless you meet certain conditions of release, such as retirement. From 1 July 2021 the minimum payment will revert back to 4%.

It’s also worth noting that the income you receive is based on the amount you have in your super, so you won’t be guaranteed an income for life. And, by drawing down on your super, you may be reducing the amount you have left to fund your eventual retirement.

Case study – How your annual minimum and maximum payment amounts are calculated

This example shows the calculation of the prescribed minimum annual pension amount based on the reduced minimum pension factors that apply for the 2019/20 and 2020/21 financial years. 

Scenario: John is aged 58 and invests $200,000 in a transition to retirement allocated pension on 1 July 2020. How much can John receive as income from his pension during the financial year?

The amount John chooses to receive for that financial year must be between $4,000 and $20,000 (before tax). The amount he chooses will affect how long his allocated pension will last. The more he is paid, the earlier his pension will run out.

Formula     John’s example

Investment Amount  A  $200,000
 Minimum pension factor  B   2%

Maximum pension factor C 10%
Minimum pension for a full year A x B = D $200,000 x 2% = $4,000
Maximum pension payment A x C = E $200,000 x 10% = $20,000


This example is provided by way of illustration only and is based on the facts given. Each year the annual pension amount will be recalculated based on your account balance and age at 1 July Your annual pension limits will depend on your own circumstances.

How are TTR income streams taxed?

Up to age 60, the taxable amount of your income from a TTR pension is taxed at your personal income tax rate, less a 15% tax offset. Then, once you turn 60, the income you receive from your TTR pension is completely tax-free.

The investment earnings within a TTR income stream are subject to the same maximum 15% tax rate that applies to super accumulation funds.

What other things should I consider?

Setting up a TTR income stream may present you with some useful opportunities.

For example, you could either work less, or work the same hours while sacrificing some of your salary into super. In both cases, you can use your TTR income stream to supplement any reduction in your take-home pay.

It’s important to weigh up your particular circumstances and properly assess any potential tax implications before considering a TTR pension. This includes:

  • talking to your super fund, as not all funds accommodate TTR income streams
  • figuring out if you want to reduce your work hours, or work full-time and salary sacrifice
  • thinking about your income sources and calculating your income needs
  • finding out what your government entitlements are, as there may be implications

Allocated Pension or Account-Based Pension

What is an allocated pension?

Video transcript

A common fear that people have is that spiders will walk on their face during the night. Another fear people have is that their superannuation won’t last their retirement. That’s where allocated pensions come in. 

An allocated pension - or account-based pension - helps to keep your super going as you move into retirement.  When you retire (and you meet the retirement criteria) you can open an allocated pension account, and, funds from your super account can be transferred into it, so you can continue drawing a regular income, even though you’re no longer working. However, instead of being paid by an employer, you’re being paid by your super, which is funded by you, meaning you’re your new boss, I guess. 

Your super - or pension money - will continue to be invested - as per usual - but each month, quarter, half year, or year - whatever you’ve decided on, will be received as a payment.

However, like any other investment, returns will vary depending on how the market is performing. So, to learn more, about whether it’s right for you and find out about limits and conditions that apply, speak to your super fund or your financial adviser. 

There’s no limit to how much is taken out in each time, however, a minimum amount will need to be withdrawn each year depending on your age, until the balance is exhausted. Which means that while there’s no guarantee that an allocated pension account will mean money for the rest of a person’s life, it’s a good way to get a regular income, and your new boss is a pretty good boss. And you’d hope so. It’s technically you.

An allocated pension (or account-based pension) allows you to draw a regular income from your super savings once you have satisfied a superannuation condition of release, such as retiring after reaching your preservation age. You can also make lump sum withdrawals.

Because an account-based pension is made up of the money you’ve saved in super (which differs from person to person) it’s likely that it won’t provide an endless income.

Are there restrictions to how much I can withdraw?

While there’s no limit to how much you can withdraw from an account-based pension you’ll need to withdraw a minimum amount every year.

This amount is calculated based on your age and will be a percentage of your account balance. The table below shows you just how much.

Age Normal Yearly minimum withdrawal Yearly Minimum withdrawal in 2019/20 and 2020/21
Under 65 4% 2%
65-74 5% 2.5%
75-79 6% 3%
80-84 7% 3.5%
85-89 9% 4.5%
90-94 11% 5.5%
95+ 14% 7%

Case study – How your annual minimum payment amounts are calculated

This example shows the calculation of the prescribed minimum annual pension amount based on the reduced minimum pension factors that apply for the 2019/20 and 2020/21 financial years. 

Scenario: Irene is aged 68 and invests $150,000 in an allocated pension on 1 October 2020. What is the minimum amount Irene must receive as income from her allocated pension during the rest of that financial year?

To work out her minimum annual pension amount, we first calculate the minimum annual pension amount for a full financial year (as if she invested on 1 July). As Irene only invested part way through the financial year, we then pro-rata this amount for the part of the financial year for which she is invested. The minimum annual payment amount is rounded to the nearest $10. In this example, all figures have been rounded to the nearest $10.

The amount Irene chooses to receive for that financial year must be at least $2,800 (before tax). The amount she chooses will affect how long her allocated pension will last. The more she is paid, the earlier her pension will run out.

Formula Irene’s example

Investment Amount   A  $150,000
 Minimum pension factor  B  2.5%
Minimum pension for a full year A x B = C $150,000 x 2.5% = $3,750
First  year minimum pension is less (as she invested part way through the year, on 1 October)
Number of days in the full financial year D 365
Days remaining in financial year from 1 October E 273
Minimum pension that must be received in 2020/21 C x (E ÷ D) $3,750 x (273 ÷ 365) = $2,800

This example is provided by way of illustration only and is based on the facts given. Each year the annual pension amount will be recalculated based on your account balance and age at 1 July. Your annual pension amount will depend on your own circumstances.

Is there a limit on how much I can transfer?

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

If you have a balance above that, the excess will need to be left in the super accumulation phase (where earnings will be taxed at the concessional rate of 15%) or taken out of super completely.

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

What taxes will I pay?

Generally, you will not pay tax on investment earnings.

If you’re between your preservation age 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 the pension payments you receive.

If you transfer more than $1.6 million into retirement pensions, tax 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.

Can I choose my investments?

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 on your behalf.

Keep in mind that 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.

Annuity

An annuity provides a series of regular payments over a set number of years, or for the remainder of your life, depending on whether you opt for a fixed-term or lifetime annuity.

The payments you receive depend on factors, such as the amount you put in and actuarial calculations, which look at economic and demographic factors to estimate future liabilities.

What are the potential advantages of annuities?

  • You receive a guaranteed fixed income, regardless of movements in the share market.
  • You can choose for your regular payments to keep pace with inflation.
  • You can typically choose to receive regular payments monthly, quarterly, half-yearly or yearly.
  • If it’s a lifetime annuity, you remove the worry of outliving your savings.
  • Any income you receive from an annuity you purchase using your super money is tax free from age 60.
  • Income from certain annuities may receive beneficial Centrelink treatment.

What are the potential disadvantages of annuities?

  • You may have limited or no access to lump sums of money.
  • You may underestimate life expectancy with a fixed term annuity, so money may run out.
  • You might not be able to transfer your annuity money to another pension product.
  • In the long run, an annuity might pay lower returns than a market-linked investment.
  • Depending on the annuity type, little or no benefit may be payable to your beneficiaries.

The government’s Age Pension

The Age Pension is different altogether as it is a government benefit paid to eligible Australians who have reached their Age Pension age.

The age at which you can access your super and the age at which you’ll be eligible for the Age Pension (if you’re eligible for it) aren’t necessarily the same.

Date of birth Age Pension eligibility age
 Before 1 July 1952  65 years
1 July 1952 - 31 December 1953 65 years and 6 months
1 January 1954 - 30 June 1955 66 years
1 July 1955 - 31 December 1956 66 years and 6 months
From 1 January 1957 67 years

What other eligibility criteria apply?

Currently, to be eligible for a full or part Age Pension, you must satisfy an income test and an assets test, as well as other requirements1.

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

The maximum Age Pension (including supplements) is currently $944.30 a fortnight for a single person and $1,423.60 a fortnight for a couple2.

Withdrawing super as a lump sum

When the time comes for you to access your super, you might also be wondering whether you’d be better off taking the money as a lump sum rather than as pension payments.

Withdrawing super as a lump sum isn’t always the best option and there may be tax implications to consider. Before making a decision, 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.

What are the potential tax implications?

If you’re going to take a lump sum, you should also look into tax rules. If you’re over age 60, super money you access will generally be tax free, whereas if you’re under 60 you might have to pay tax on your lump sum.

Likewise, if you invest the money, depending on where you put it, you may be taxed on the interest you make or be subject to capital gains tax. Whether withdrawing your super as a lump sum is tax-effective or not depends on your individual circumstances.


1 & 2 Services Australia (Eligibility and payment rates). The rates shown exclude any Covid-19 supplements that may be payable

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