Retirement planning takes time and if you’ve got a superannuation account, it is useful to have a retirement goal to know if you’re on track or not for your desired retirement income. Retirement income can come from a number of sources including:
- An account-based pension,
- A defined benefit pension,
- Investments outside of superannuation,
- Part-time employment,
- Centrelink age pension entitlements,
- Home equity release, or
- Downsizing the family home.
So what is an account-based pension?
A superfund where your employer or yourself can put in money and your money is invested to get a return is called an accumulation fund. At retirement, you can turn your accumulation fund into an account-based pension to receive an income stream.
What are the typical features of an account-based pension?
- You can choose the amount of income you receive each year, within a range set by law.
- You can invest your money in the same kinds of assets that you’ve held in your super fund.
- Your account-based pension income can usually paid month, quarterly, half-yearly or yearly. You get to choose.
- You are allowed to take a lump sum withdrawal, known as a commutation, from your account-based pension, should you need some extra cash.
- Your account-based pension will continue to pay you until the money runs out.
- You get to make a choice about what happens to your account-based pension if you pass away.
What are the typical advantages of an account-based pension?
There are a number of benefits to having an account-based pension in retirement. These might include:
- In addition to your account-based pension, you may be able to access Centrelink age pension entitlements. Asset and income tests apply.
- You won’t pay tax on pension payments once you turn 60 years of age.
- Your investment earnings on an account-based pension are tax-free provided you have $1.6 million or less in your account at the time of starting the account-based pension. If you have more than $1.6 million then penalties may apply.
- You decide (within a range) what pension payments you want to receive and if you want to take a lump sum.
- You can choose how your money is invested, just like you did with your accumulation superfund.
- Surplus franking credits are returned to the fund to bolster returns and to help fund pension payments.
- You decide what happens to your account-based pension should you pass away. You might elect to have it paid in full to your beneficiaries or spouse. You can also nominate a spouse or dependent person to receive your ongoing pension payments. This is called a reversionary pension.
What are the typical disadvantages of an account-based pension?
There are a couple of drawbacks to having an account-based pension in retirement. These can include:
- Your investments, just like in your accumulation superfund are not guaranteed and will fluctuate as investment markets move. Performance will be affected by the investment options you choose.
- There is no guarantee that your account-based pension will last as long as you do. You may outlive your pension payments. This is one reason why it is important to have a plan.
- You must draw an annual pension payment equal to the legislated minimum each year. This will require you to review the assets held to meet liquidity requirements throughout the year.
- The asset value and associated income are generally assessable for Centrelink purposes. Some grandfathering provisions may apply depending on when your income stream was commenced.
- Generally, once a pension income stream is commenced you cannot add to its capital value.
How do you determine if an account-based pension is appropriate for you?
Seeking advice can help you understand your retirement goals, assess your retirement income options and put a plan in place to deliver you with a retirement income stream.
Financial planning advice can help you work out:
- If you and when you can afford to retire.
- How much income you can receive.
- How an account-based pension might work for your retirement.
- How Centrelink age pension can fit with an account-based pension.
- Which investment options are appropriate for you.
- Estimate the length of the pension, given certain scenarios.
- Help you put in place estate planning matters around an account-based pension.
- Take into account the recent legislative changes that impact the tax efficiency of pension structures.
To make an appointment to speak with Luke, please call Envision Financial Services on 02 6260 4749 or contact us here.