There are a number of ways to fund your retirement, but if you’re looking to retire and want to receive regular income while having flexible access to your funds, you may want to consider talking to an adviser about whether an account based pension (ABP) may be suitable for you. ABPs can provide a convenient, flexible and tax-effective income when you retire.
What is an account based pension?
Think of an ABP as a personal retirement income account operating in your superannuation fund. You’ll receive regular income payments, while at the same time your account balance can remain invested. At all times, you have full access to the funds in your ABP.
Who’s eligible to start an account based pension?
Before you can access any of your superannuation and start an ABP, you need to have met a ‘condition of release’. This is a legal requirement.
The most common conditions of release where you can consider starting an ABP are:
- you’ve reached your preservation age1
- you've reached your preservation age and don’t intend to be gainfully employed for 10 or more hours each week
- you’ve finished an employment arrangement on or after the age of 60
- you’re 65 or older (even if you haven't retired), or
- you’re permanently incapacitated.
A transition-to-retirement pension lets you access some of your super via an ABP while you keep working. The rules are slightly different for transition to retirement pensions and this article only talks about standard ABPs. You can learn more about transition-to-retirement pensions here.
How does an ABP work?
Once you’ve met a condition of release, you can ask your superannuation fund to start an ABP for you. Your accumulated superannuation will be transferred to a pension account and you can start receiving regular payments. The pension payments will continue as long as there’s money left in your account. How long that will be depends on:
- your starting balance
- how you choose to invest it (and the performance of your chosen investments)
- the level of income you draw, and
- whether you take out any lump sum payments along the way.
While there’s no guarantee income from your ABP will last your lifetime, the tax concessions that apply to ABPs may help your savings to last longer than if they were invested outside super.
The benefits
ABPs have the following advantages:
CONVENIENT | An ABP allows you to consolidate your retirement savings in one place. This means you won’t have to keep track of several individual investments. |
FLEXIBLE | An ABP generally allows you to:
You can adjust all of these to ensure your pension continues to suit your changing circumstances. This flexibility is one of the reasons many financial advisers recommend ABPs as the cornerstone of a retirement income plan. |
TAX-EFFECTIVE | The investment earnings added to your pension account are generally tax free. If you’re aged between preservation age and 59, pension payments may be taxable, but often they’ll include a tax-free component. You may also be eligible for a 15 per cent tax offset on the taxable component of your pension payments. If you’re aged 60 or more, any benefits paid to you (as either a pension or lump sum) are generally tax free. |
Choosing your payment levels and investment strategy
When selecting both the investment strategy and payment levels for your ABP, it’s important to think about how long you want your pension to last. You may also consider things like social security entitlements, other investments you hold (and the income you receive from them) and your general health.
Pension payments
As mentioned, you’re required to draw at least a minimum annual payment from your ABP. However, depending on your income requirements, you may want to draw more than the minimum amount. The higher the pension payments you choose to receive, the faster your remaining balance will be depleted.
You also have the flexibility to adjust your payments from year to year to suit your circumstances. For example:
- You may choose to take larger pension payments from your ABP now and reduce the payments later because you have access to another investment or social security benefits in a few years, or
- You may want to take smaller payments initially to take advantage of compounding investment returns, so your pension may last longer.
Investment mix
Choosing the investment strategy for your ABP is another important consideration.
The investment options you select will depend on how comfortable you are with investment risk. As a general rule, the bigger the potential investment return, the higher the investment risk. While it may seem prudent to make more conservative investment decisions as you get older, it’s important to not be too conservative as your retirement savings may need to last quite some time.
Seeking help from a financial adviser
We recommend speaking to a financial adviser to help you decide on a retirement strategy that suits your circumstances. You should then review your strategy and needs with them at least once each year to make sure you stay on track to meet your goals. Your income needs may change over the course of your retirement and they can help you balance maximising your income with ensuring the pension lasts.
