Account Based Pension Fund
An account-based pension is an income stream paid from your superannuation savings.
It is basically the re-invented version of the superannuation fund you had for the past 40 years and it has been converted from Accumulation Phase to Pension Phase to provide you with a regular income.
In order for you to earn an income stream from your super fund it must be in Pension phase. You must nominate what the annual per cent draw down amount will be (EG 5% of entire account balance) and payment frequency.
In a perfect world, for every dollar that you draw out from your account-based pension you want to see it replaced dollar-for-dollar with investment growth and income from the funds it’s invested in.
For example, if you draw down $12,000 per year from the fund then you want to see the fund grow by $12,000 so the NET result on your withdraw is $0.
But unfortunately, that’s not always possible especially when you have a smaller account balance and use a conservative investment strategy such as 75% of the entire fund invested in Term Deposits – A smaller account balance is generally anything under $500,000.
You can set up your account-based pension in a way that suits you such as the amount and frequency of payments made.
There are no upper limits to how much you can withdraw but there are minimum yearly payment amounts that vary based on your age.
You can review the minimum withdraw amounts on the ATO webiste here > Minimum Annual Pension Payments
You can set up a super pension account with your current super fund or a different fund, as long as you can access the specific investment options that you have received advice on.
You can also start a super pension from your SMSF.
To be eligible to start your super pension you must satisfy a condition of release such as reaching your preservation age. If you are under 65 you must have retired from the workforce, but you can access your super without restrictions once you turn 65.
Benefits of Account Based Pensions
Tax Savings
The main benefit of drawing an income from a super pension fund rather than using or relying on investments held outside of super such as share Dividends, withdrawing cash or rental income is the absence of tax payable.
Once your super enters pension phase, both the earnings on investments in your pension account and the income you receive is tax free once you are over 60 years of age.
If you are aged 55–59 then the taxable portion of your pension income is taxed at your marginal rate less a 15% tax offset. So if your current tax rate is 32% then you are taxed as follows:
- Income Amount > $12,000
- Tax Payable > $3,840
- Less 15% Offset > $1,800
- Net Tax Payable > $2,040
Flexibility
The other benefit of an account-based pension is flexibility. You decide how the money in your account is invested and whether you want to withdraw the income monthly, quarterly, six-monthly or annually.
You also have the option of withdrawing some or all of your money as a lump sum or rolling it back into an accumulation account, although this would not be generally recommended unless you return to work or receive specialist advice.
Also withdrawing your super as a pension income stream rather than a lump sum amount also allows the growth component of your savings to keep growing inside the pension fund in a tax-free environment.
Disadvantages of Account Based Pensions
The main problem we see amongst retirees planning their retirement or in retirement is that the Equity and Growth component of your fund will fluctuate with financial market movements which means the investment earnings are not guaranteed or predictable, depending on the investment options you choose.
If the market falls steeply, the requirement to withdraw a minimum amount each year effectively crystallizes your loss because you are withdrawing funds as the market and value of your fund reduces with the volatility.
So for retirees with a small pension fund balance you could run out of funds or be forced to stop drawing down and income unless you have other sources of income to use.
This is why it’s especially important to receive financial advice and have a specialist retirement planner monitor your investments and provide you with an expert opinion to keep you on track and focused on the bigger picture outcome rather than reacting to news headlines and emotion.
Also a good retirement planner will setup your pension withdraws in such a way that withdraws you make will have little to no impact on the growth component of your pension fund, so even if the markets to tank like they did at the start of the pandemic in March 2020 then you are still well positioned to weather those storms without affecting your income.
Christian Lazarou is a specialist investment advisor for investors or retirees that intend to use ETFs as part of their investment or retirement strategy and has experience in navigating peoples investments during volatile market periods.
Please seek expert advice from a qualified financial planner when considering ETF’s and you can fill in the form below to speak with one of our professional retirement planning financial advisors.
This page discusses more on how to include Exchange Traded Funds (ETF’s) in your account based pension fund.