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Retirement planning comes with a lot of new financial terminology to learn, and one important concept is the ‘Account-Based Pension’. Understanding how it works, how it’s taxed, and how it fits into your retirement strategy is essential. From an accounting perspective, the key focus is on tax, reporting, and compliance – but these decisions also connect with broader financial planning. Let’s break down the essentials.
What is an Account-Based Pension in Australia?
It is an income stream paid to you from your superannuation, as a way of funding your retirement. Superannuation has two distinct phases: the accumulation phase, where you are adding to your super balance while you work, and the pension phase, where those savings are spent to fund your retirement.
You can start an account-based pension when you reach ‘preservation age’, and satisfy a condition of release. If you were born before July 1960, the preservation age is 55. If you were born between July 1960 and July 1961, the age increases to 56 and continues up to a preservation age of 60 for those born on or after 1 July 1964.
An account-based pension differs from the government Age Pension because it is funded with your own money, rather than government funds.
Why Choose an Account-Based Pension?
You may decide to arrange an account-based pension in retirement for the following reasons:
- You have your super in an accumulation account, and the earnings are taxed inside the super fund. If it’s converted to an account-based pension, the exempt pension earnings are tax free inside the super fund. There is a lifetime limit on the amount you can transfer into an account-based pension (the Transfer Balance Cap).
- You can use your account-based pension to top up other forms of income, such as the Age Pension (subject to eligibility).
- You can potentially choose from weekly, fortnightly, monthly, quarterly, half-yearly, or annual payments, depending on your account-based pension provider.
- If you’re over 60, account-based pension payments are generally tax free (seek tax advice prior to commencing an account-based pension)
For the 2025–26 financial year, the minimum drawdown rate for account-based pensions starts at 4% of the fund balance for those under 65 and gradually increases with age, reaching 14% for people aged 95 and older. These withdrawals are calculated on the account balance as at 1 July each year and are prorated if the pension starts partway through the year.
The minimum draw down rates are designed to ensure that your super savings are spent during retirement. As you withdraw money from your account-based pension, the balance may drop if the returns are not outpacing your withdrawals. The Government’s account-based pension calculator can help you figure out how long your money will last, although you have to be aware of the changing costs of living and the potential for unplanned expenses.
How you structure your pension withdrawals can affect your assessable income and potential eligibility for tax offsets. Beneficiary nominations also involve estate planning and tax considerations, especially when superannuation death benefits pass to non-dependents.
If You’re Still Working
There is also something called a ‘transition to retirement’ income stream. We recommend you speak with your financial adviser to help you determine your eligibility.
Generally speaking, the maximum you can withdraw from your superannuation as a transition to retirement income stream is 10 per cent of your balance each financial year.
Can I access an Account-Based Pension as well as the Age Pension?
Access to an account-based pension and the Age Pension have different eligibility criteria. To qualify for the government Age Pension, Centrelink applies an assets and income test. If you exceed the thresholds, your Age Pension entitlements may reduce, or you may not be entitled at all. You can check the current thresholds on the Services Australia website.
A financial planner can help you get a clear picture of whether you are eligible for the Age Pension based on your situation.
How to Arrange an Account-Based Pension
The first thing you need to do to arrange an account-based pension is to speak to your superannuation fund or your financial planner who can provide advice and assist you with the process.
By working together with an accountant and a financial adviser, you can have confidence that your retirement strategy is both effective and compliant. Contact Crest Accountants today to discuss how we can support you.
Disclaimer: The information contained in this news post is general in nature and is intended to provide a general summary only and should not be relied on as a substitute for professional advice. Whilst the information is considered to be true and correct at the date of publication, changes in circumstances after the time of publication may impact upon the accuracy of the information.
