Understanding Account-Based Pensions

Understanding Account-Based Pensions

Account-based pensions are a flexible and popular way to access your superannuation savings during retirement. They provide a regular income stream while allowing your remaining balance to stay invested. Here’s what you need to know about account-based pensions.

What is an Account-Based Pension?

An account-based pension is a retirement income product that allows you to withdraw money from your superannuation savings in regular payments. Once you meet a condition of release, such as reaching preservation age and retiring, you can convert your super into an account-based pension.

How Do Account-Based Pensions Work?

• Flexible Payments: You can choose the amount and frequency of your payments, provided they meet the government’s minimum drawdown requirements. These requirements are based on your age and super balance.
• Investment Growth: Your remaining super balance stays invested, giving it the potential to grow. However, it’s also subject to market risks.

Minimum Drawdown Rates

The government sets minimum withdrawal rates for account-based pensions to ensure funds are used for retirement. For example:

• Ages 65–74: Minimum 5% of your account balance annually.
• Ages 75–79: Minimum 6% of your account balance annually.

These rates may vary during specific financial years due to government adjustments, such as during economic downturns.

Key Benefits

1. Tax Advantages:

• If you are aged 60 or older, your account-based pension income is generally tax-free.
• Earnings on investments within the pension account are also tax-free.

2. Flexibility:

• You can adjust your payments to suit your lifestyle needs, provided they meet the minimum withdrawal requirements.

3. Estate Planning:

• Any remaining balance can be passed on to your beneficiaries as a lump sum or income stream upon your passing.

Considerations

• Longevity Risk: Your account balance may run out if withdrawals and investment returns are not carefully managed.
• Market Fluctuations: The value of your pension depends on market performance, which can affect your balance over time.
• Fees: Some super funds charge fees for managing account-based pensions, which can affect your returns.

Is an Account-Based Pension Right for You?

Account-based pensions are an excellent option if you want flexibility in managing your retirement income. However, careful planning is essential to ensure your savings last. Consider consulting a financial adviser to create a tailored strategy that aligns with your retirement goals.

By understanding how account-based pensions work, you can make informed decisions and enjoy a financially secure and comfortable retirement.