1 July 2021 (updated annually)
You've spent your life accumulating your super and now you are nearing those retirement years you've been dreaming about. What happens now? How can you ensure that you are going to get the most out of your super?
One option that you can look into is an account-based pension (sometimes referred to as a super income stream). This will provide you with a regular and tax-effective income stream during your retirement.
You use the money you have accumulated in super to purchase an income stream, or account-based pension, that will pay you a regular income from your super. The income stream will usually be available once you've retired from work but in some circumstances, you may be able to access the money before you retire.
Every year you will need to withdraw a minimum pension payment, which will be calculated according to your age. There is no maximum payment amount limit, unless the pension was commenced as part of a transition to retirement pension.
Your account-based pension account can hold a range of investments – including shares, fixed interest, cash and managed investments – depending on the investments offered by your fund. However the maximum super an individual can use to purchase an account-based pension is up to their personal transfer balance cap, which may be from $1,600,000 to $1,700,000.
A transition to retirement pension is a more restrictive form of an account-based pension because lump sums cannot generally be received. So remember to set aside funds outside super to supplement income. However, a transition to retirement pension does not benefit from the same tax-free earnings as a full account-based pension.
Some of the benefits of a transition to retirement pension include:
|When were you born?||Your preservation age|
|Before 1 July 1960||55|
|1 July 1960 – 30 June 1961||56|
|1 July 1961 – 30 June 1962||57|
|1 July 1962 – 30 June 1963||58|
|1 July 1963 – 30 June 1964||59|
|After 30 June 1964||60|
Centrelink uses deeming to assess income from financial investments. From 1 January 2015, the deeming rules are used to assess income from account-based pensions.
Deeming assumes that financial investments are earning a certain rate of income. The current deeming rates from 1 July 2021 are:
If you had been receiving an income support payment continuously since 31 December 2014 and had an account-based pension, this pension is grandfathered and is not assessed under the deeming rules.
However, if you choose to change an existing pension to a new pension, or purchase a new pension after 1 January 2015, the new pension will be assessed under the deeming rules. Any choices you make that do not involve changing to a new product (eg changing your investment strategy) will not affect grandfathering arrangements.
If you are an income support recipient with a grandfathered account-based pension and you cease to be paid an income support payment on or after 1 January 2015, the grandfathering provisions will cease to apply.
An account-based pension can run for your lifetime, as long as there is sufficient capital available, and can be transferred to an eligible beneficiary (generally your spouse) after you die. Account-based pensions are a good way to secure an income stream for your spouse.
Joe, aged 65, has just retired and has $350,000 in super, all of which is classified as a taxable component. After meeting with his financial adviser, he decided to use his super to commence an account-based pension. Under the levels set by legislation, for the first year of the account-based pension, Joe must draw a minimum of $8,750.
Let's assume Joe wants to receive $30,000 pa as a pension. As Joe is over 60, the pension is pad 100 per cent tax-free.
Belinda is retired and 56 and has the same super balance as Joe. Her minimum payment requirement is $7,000. However, she wants $30,000 instead. Normally, the tax payable on this at marginal tax rates is $1,887. However, as Belinda has reached her preservation age (56), she receives a 15 per cent tax offset on the pension payment on the taxable component. This completely eliminates her tax liability. The Medicare levy may still apply.
When you start an account-based pension, an important decision you need to make is how the remaining balance of your pension will be distributed upon your death (assuming, of course, that there is some money left).
With regard to your account-based pension, you can generally make the following nominations:
Under the non-binding beneficiary option, the fund's trustee will always have ultimate discretion as to who will receive your super death benefits. A binding nomination option may not always be valid (eg if your circumstances change and you forget to revise your nomination). The reversionary beneficiary option, however, is the option that will provide greater certainty that your intended beneficiary (provided they are an eligible dependant at death) will receive an ongoing pension following your death.
Because of the restrictions on pension payments to child beneficiaries (ie benefits must be commuted and paid out when the child turns 25), many superannuation funds only permit a reversionary option to a spouse.
|Age of deceased/dependant||Tax component||Tax treatment|
|If either or both aged 60 or over||Tax-free||No tax payable|
|Taxable - taxed element||No tax payable|
|If both under age 60||Tax-free||No tax payable|
|Taxable - taxed element||Marginal tax rate, but 15% tax offset applies|
Make sure you have the right strategy in place so that your investment has the potential to grow and you are not just drawing from your retirement savings.
You need to be aware that account-based pension payments are not guaranteed to last your lifetime. As they are linked to the market performance, if markets rise or fall, your pension payments may increase or decrease from one year to the next.
Your account-based pension payments will cease once the account balance is exhausted.
You should also keep in mind issues that may interrupt your retirement strategy, such as the possibility of redundancy or an unplanned early retirement.