Account-based pensions

Big part of my videos on this channel About Retirement TV and my blog articles on my website is explanation of how to be best prepared for retirement income-wise, and how to structure your income for the best outcome of your cashflow, maximising Age Pension, minimising tax in retirement as well as ensuring that your assets will last the distance and will support you for as long as you need.  

And let’s not forget that many families want to leave some kind of a financial legacy for children or grandchildren, which also requires appropriate planning.  

But only now, I realised that I have never actually gone through the types of income streams that are available to you in retirement and how to know good and bad of each. So, let’s start this topic today.  

“The question isn’t at what age I want to retire, it’s at what income.“ 
George Foreman 

In Australia we generally have 4 types of retirement income streams, otherwise called pensions:

1. Transition to Retirement – also known by the name of TTR pension. This is kind of pre-retirement income stream, used in particular situations: 

• to help you either slowly get ready for retirement while reducing your working hours and supplementing your income from TTR pension,  
• or using it to boost your superannuation and reduce your income tax. 
  See full explanation how TTR pension works “Can I access my super and continue working?”  

This can be a fantastic retirement strategy for some, so if you really want to boost your retirement savings and income, feel free to contact me to discuss if it could assist you in your situation and in improving your retirement planning. 

2. Account Based Pension – also known as Allocated Pension – this is what we are talking about today. 

3. Annuities – this type of a retirement income stream can be very helpful, especially if you are a more conservative investor type.  

It can provide a great deal of income certainly, sometimes assist with improving your Age Pension benefit, but due to many options and choices can be very complex.  

Therefore, the outcome could be extremely positive for your retirement and income longevity, but if implemented incorrectly, it can introduce a great deal of headache. We will be discussing annuities in the future videos and articles.

4. Age Pension – you will find 15 videos fully dedicated to explanation of Age Pension system in Australia, starting with the most popular video on my channel: “9 ways to legally hide money from Centrelink Age Pension”. 

I am sure that if you watch all those videos, your understanding of the Age Pension system will be so much better and clearer. But for the best results, always get advice from a specialist retirement planner.  

As mentioned before, our today’s chat is about Account Based Pensions, also known as Allocated Pensions. This is the most popular type of a retirement income stream provided by most superannuation funds.  

What is an Account-Based Pension?  

If you have superannuation savings and you reach your preservation age, you can change your superannuation from the accumulation phase to a pension phase and start receiving a regular income from your superannuation pension account. If you don’t know what preservation age is, view:  “When can I access my super?” to get the answers.  

Account based pension provides regular payments that are flexible and tax-effective during your retirement.  

It is regular, as you can decide how often you wish to receive your income, weekly or fortnightly (be aware that not all super funds provide income that frequently), monthly, quarterly, semi-annually or annually. This is your choice.  

Income is flexible, so you can choose the level of income you want to receive. There is a government prescribed minimum that has to be paid out to you, which is based on your age: 

During Covid market turbulence, the government allowed a 50% reduction of that minimum for retirees who could afford it, to help with lower assets withdrawals to cover those income payments. 

This way you were able to benefit from market rebalance and investment earnings, which happened surprisingly fast. If you are a retiree who took advantage of this reduction, you have done very well, it was a very smart decision that will prolong life of your income stream by few extra years. 

Allocated pension do not have a maximum income payments, this is your choice, and you can draw as much as the full balance of your pension. But please don’t do that, unless there is an urgent and very important reason, or part of well-designed retirement plan.  

How does Allocated Pension work? 

You commence your account-based pension by rolling over the specific amount from your existing superannuation account to a pension account.  

Allocated pension does not accept private money, only superannuation money. Once commenced, you cannot add any additional money.  

As I mentioned before, you decide on the level of income you wish to receive, as long as the pension account pays out at least the minimum payment.  

This minimum payment is counted on 1st of July each financial year as a percentage of your balance on that day. That percentage is based on your age, so refer to the table I’ve just explained.  

This is the reason why your pension payments will keep on changing from year to year if you receive the minimum prescribed income, as your total balance of the pension changes from year to year.  

How is Account Based Pension invested?  

Investing in an account based pension is a positive and a negative at the same time. The positive is that your money is invested in a chosen by you portfolio, therefore invested in the market. The negative is that your money is invested in the market.  

As you can see market can introduce a very positive or a very negative outcome for your income stream, so you have to choose your investments wisely.  

Picking a portfolio out of a hat, just because this is what is advertised by the super fund on TV is not a very smart strategy.  

Your investment portfolio needs to match your risk profile, otherwise you will be under a constant stress over underperformance, volatility and investment risk.   

How long will my Account Based Pension last?  

This is exactly where your account-based pension falls short. There is no guarantee how long your income will last.  

What’s worse the outcome is not only dependent on the level of income you draw year after year, but on the level of returns of your pension fund – and you really have no control over this part of your pension behaviour.  

What’s worse, it very much depends on the order of such returns, and that is known as a sequencing risk. Fully explained in: “Investment risk in super“.   

The investment risk in superannuation and subsequently in your pension fund, I think is greatly underestimated and misunderstood altogether. And if this is you, please get professional advice as to how to set up your portfolio for the best investment outcomes for you.  

What are benefits of account based pension? 

1. Investment earnings are tax -free, that does not apply to the Transition to Retirement pension though.  
2. If you are over the age of 60, your pension payments are generally tax-free. For this reason I do not recommend starting the pension account before you reach age of 60. 
3. Also, if you are over the age of 60, any lump sum withdrawals are generally also tax-free. 
4. As listed above, you can vary your income payments and investment portfolio is subject to your choice and your decision  

What are negatives of account based pension?  

1. Lack of income certainly 
2. Market volatility of investment returns 
3. Returns and level of income are not guaranteed to last for as long as you might need to.  

What happens to your account based pension after you die?  

When setting up a super account or your pension account, it is a good practice and frankly should be one of your responsibilities to prepare the Superannuation Death Benefit Nomination. This is to ensure that your super or pension savings will be paid to the right beneficiary, the beneficiary chosen by you.  

You can find the full explanation of what happens to your super and your pension: “Who gets your super when you die?” and: “Super Death Benefit gone terribly wrong“ to see what can happen to your savings if you don’t follow the rules and don’t receive appropriate advice.  

So how do you feel about the account-based pension? Do you believe this is an appropriate income stream type for you? Do you feel comfortable setting it up and choosing the correct investment portfolio? If unsure, feel free to contact me for full personal advice.