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29 March, 2018
A Guide to Account-based Pensions
First Financial Team
Some of the information in this article may be out of date. We are currently in the process of updating our content to reflect FY26 details.
A regular income in retirement...
is fundamental for most retirees. When you stop working, you want to know you’ve got enough money to enjoy the years ahead. You need it to last as well. But worrying about finances isn’t on anyone’s bucket list.
Choosing what to do with your accumulated superannuation is a core part of retirement planning. It can make all the difference to achieving your retirement goals. Getting reliable and trustworthy advice is vital. Here, we take a look at an investment vehicle which is geared towards giving retirees a flexible, tax-free income stream.
What is an account-based pension?
An account-based pension is a pension which you purchase with money from your super fund on retirement.
It’s a good choice if you want a regular, flexible and tax-effective income stream during retirement.
These accounts are popular for retirees who want to withdraw their super in stages instead of a single lump sum.
Setting up an account-based pension
You transfer a lump sum from your super fund into an account-based pension fund. The maximum amount you are allowed to transfer is $1.6m.
To access money from your super fund, you must meet a ‘condition of release’. The easiest is simply turning 65. At that age you can automatically withdraw your super even if you’re still working. You can also withdraw your super at age 60 if you leave your job with an employer. If you are under 65, you must reach your ‘preservation age’ which is currently age 57. That gradually increases until age 60 for those born after June, 1964.
Tax-free earnings
A significant benefit to account based pensions is that all your investment earnings are tax-free. For those over the age of 60, whether you withdraw a regular income or a lump sum, you do not pay tax on your pension payments. If you are aged 55-59, the taxable portion of your account-based pension will be taxed at your marginal tax rate less a 15% tax offset.
You can make your earnings tax-free for your estate too. There are a number of strategies we use to structure your account-based pension so that the tax-free benefits extend to your estate. It’s worth talking to one of our advisers to learn more about this.
Withdrawal requirements
After you open an account-based pension, the government requires you to withdraw a minimum amount each year.
This depends on your age. Currently, between the ages 55 and 65, you must withdraw 4%.
Those aged 65–74 must withdraw at least 5% per year, and for 75−79 year olds, at least 6%.
Flexible and reliable
The nice thing about these funds is their flexibility. You can take as much income as you like. The maximum you can withdraw is the account balance. You decide the frequency and amount of your payments.
You can make it monthly, so it’s just like a continuation of your salary. Or take a quarterly, six-monthly or even an annual payment.
And you can withdraw some or all of the balance if you need the cash or change your mind.
You get the security of a regular income to support your lifestyle as well as flexibility.
Make it part of an overall plan
Of course, the more you withdraw, the quicker your money will run out. Account-based pensions are not guaranteed to last for a set period of time. How long will depend on how much you withdraw each year. So it’s important an account-based pension is part of an overall investment strategy for your retirement.
Structuring your account-based pension to maximise the income for you and your estate is where we can help. Working with a trusted adviser will remove the worry and ensure you have a carefully prepared plan that offers income and growth, so you enjoy a stress-free retirement.
To discuss opening an account-based pension, or for broader retirement advice, contact one of our advisers. Read more Retirement Planning articles.
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