What is an Account Based Pension?

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When one is looking at finishing up work and investing your money (the word ‘retirement’ has too many negative connotations), one of the finest tools available to us is the Account Based Pension. Formerly referred to as an Allocated Pension, it is also called other names; for example Sunsuper call it a Retirement Income Account.

Use of the word ‘pension’, can be confusing as well – it sounds like the Age Pension, which is what the Commonwealth Government pays if you meet the assets and income tests.

Tax Free
Yes it is free from tax. Beautiful eh? If you are over age 60 the earnings are tax free and the payments you receive are tax free. (If you are under age 60 then it may be a Transition to Retirement pension – that is taxed at the same level as super which is up to 15% on earnings. Because of this one would normally only consider a Transition to Retirement pension if a client still had significant debt).

Preservation Age
You need to be above age preservation age, which is between age 55 and age 60, to start an account based pension. There is a table of dates but if you are born on or after 1 July 1964 then it will be age 60 for you.

Condition of Release

In addition to being above age pension age, you will need to meet a Condition of Release. The most common ones are:

1) reaching preservation age and retiring.
2) reaching preservation age and commencing a transition-to-retirement income stream.
3) ceasing employment on or after age 60.
4) turning 65 (even if you haven’t retired).
5) severe financial hardship.
6) compassionate grounds
7) terminal illness.

Minimum Withdrawal Amounts
Given the tax free status of the Account Based Pension, the Commonwealth does not want it to be used as an open ended tax structure. So you must take a minimum amount out of your account based pension. Currently these minimums have been halved due to COVID – as low as 2% of the total amount per annum. This raises with age – up to 7% of the total after age 95. After 1 July these figures will be doubled. So if you are under age 65, and have a $400,000 account based pension that would transfer into a minimum payment of $8,000 per annum or $667 per month. Again these figures will double after 30 June.

No Maximum Withdrawal

You can withdraw what you like from the account based pension. This is called a ‘commutation’. So this could be used to buy a caravan, renovate your home, or go on a holiday. Indeed it can be used for whatever you wish.

You Can Choose the Payment Frequency
Depending on the provider, you can get paid weekly, fortnightly, monthly, half-yearly or annually. I personally would go for the most frequent payments (say weekly if it is available), as I think this allows clients to manage their cashflow. However many clients choose what they are used to – for example monthly if that was their pay cycle when they were working.

How Long Will it Last?
For clients we normally model how long their income stream may last. This will depend on how much they are drawing out of the product (both regular payments and one off payments), how the fund is performing (the return) and fees being paid.

The return on the investment will depend on how the funds have been invested. Ideally they will be invested in line with your assessed risk pk profile – for example a balanced risk profile into a balanced investment.

What Happens to it When You Die?
You can nominate a ‘reversionary beneficiary’, typically a spouse, to receive the money from the account based pension when you die.
Alternatively you can make a death benefit nomination, which can be binding or non-binding. These nominations can only be made to a spouse, dependant, or to your estate.

So the account based pension is a very useful thing to have.

As always this is general advice only so seek your own personalised advice from a financial planner.

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