Everything you need to know about account based pensions
Superannuation can be used to start an account-based pension once a person retires (or meets another condition of release). This allows income to be received as a series of regular payments (usually monthly, quarterly, half yearly, or yearly)
A minimum amount of income needs to be paid each year and additional lump sum withdrawals can generally be made at any time. The pension can also be stopped (fully commuted) and be rolled back to the accumulation phase of superannuation, or rolled over to start another income stream, or be taken as a lump sum. Restrictions apply to taking lump sum withdrawals where the pension is being paid under transition to retirement rules.
Account based pensions stop once the account balance is exhausted, the pension is commuted, or upon the death of the person unless there is an automatic continuation of the pension to a nominated reversionary beneficiary.
The maximum amount that may be used to commence a ‘retirement phase pensions’ is limited to an individual’s transfer balance cap. The general transfer balance cap is currently $1.9m however where a person commenced a retirement income stream prior to1 July 2023, their personal transfer balance cap may be less than $1.9m. Pensions paid under transition to retirement rules are not a retirement phase pension and are therefore not affected by the transfer balance cap.
A person can select how much income to receive each financial year. This allows flexibility to meet individual needs. The only rules for how much pension must be taken are:
We suggest you refer to the government sources for the most current minimum percentage factors. Pensions being paid under transition to retirement rules are subject to a maximum income limit of 10% of the account balance.
It is critically important that you seek the appropriate financial advice to discuss the potential tax implications of a pension income stream or a lump sum withdrawal. As a general rule of thumb, the tax free portion of your funds withdrawn will be tax-free, the taxable untaxed elements will have tax components and the taxable (element taxed) may have tax depending on the circumstances.
If you withdraw a taxable component and tax is paid on this amount, it is added to your assessable income and may impact your entitlement to other tax offsets or benefits. This may mean you pay more tax than you expect on other income in that year.
Earnings added to a retirement phase pension account (excluding transition to retirement pensions) are tax-free. No tax is payable within the superannuation fund, and this can help to boost the effective earnings rate.
Income received from a superannuation “account based” or “allocated” pension is often favourably assessed under the income test used by Centrelink and the Department of Veterans Affairs to determine a person’s entitlement to government income support benefits. Such benefits might include the Age Pension, Disability Support Pension, Newstart Allowance, and the like.
This means that a person currently receiving income support benefits may often be able to draw a reasonably significant amount of income from their account based pension without it having a detrimental effect on their government income benefit.
Legislation was passed in March 2014 that changed the way in which account based pensions are assessed for income test purposes. The change took effect from 31 December 2014. Account based pensions were brought into line with other “financial Investments”.
There are two groups of people who are affected by this change:
Those people receiving income support as at 31 December 2014 and had an account based pension in place as at that date, will not be affected by the changes unless:
There are no changes currently being made to the way the assets test applies to account based pensions.
Financial Investments
When applying the income test, Centrelink or Department of Veterans Affairs will total up the value of a person’s financial investments and then “deem” an amount of income to be applied to those investments.
The deeming rates change from time to time and are reflective of current interest rates. There are two deeming rates that apply depending on the amount of a person’s financial investments and the current rates can be accessed on the government websites
Deemed income is used when applying the income test. The actual income earned on financial investments, whether it is above or below the deemed income, is ignored when assessing eligibility for income support benefits. However, income received from account based pensions under the pre 1 January 2015 rules are assessed on a different basis.
Deemed income is used when applying the income test. The actual income earned on financial investments, whether it is above or below the deemed income, is ignored when assessing eligibility for income support benefits. However, income received from account based pensions under the pre 1 January 2015 rules are assessed on a different basis.
Income assessment of account based pensions – grandfathering provisions
When an account based pension commences, the amount of capital used to commence the pension is divided by the life expectancy of the pension recipient (or the longer of the two pension recipient’s life expectancies, where a reversionary pensioner is nominated).
The resultant amount is referred to as the “deductible amount”. This amount remains constant for the life of the account based pension unless a lump sum withdrawal is made from the pension account, at which time the deductible amount is recalculated.
The amount of account based pension income assessed under the income test is the actual income drawn from the account based pension, after subtracting the deductible amount.
Grandfathering
When legislation to have account based pensions included as financial investments for deeming purposes was enacted, the income test treatment of existing account based pensions was grandfathered. That is, provided the following conditions are met, the former income test treatment of account based pensions (i.e. actual income received, less the deductible amount) will continue to apply.
To qualify for grandfathering, the pensioner receiving government income support must:
Where a person holding a grandfathered account based pension passes away, and their account based pension was structured to automatically revert (transfer) on their death to a surviving spouse, then the original account based pension will continue to be grandfathered provided the reversionary pensioner was also in receipt of a government income support benefit at the time the pension transferred.
Conclusion regarding deeming
Whether a person will be better or worse off if their account based pension falls under the deeming rules or grandfathering provisions will depend on personal circumstances.
For example, anyone drawing an account based income stream that is significantly more than their deductible amount may actually benefit by having their account based pension treated as a financial investment and subject to deeming.
In addition to the income test, government income support entitlements may also be affected by the assets test. The test that results in the lower income support benefit is the test that is used. We have not taken the potential assets test implications into account for the purposes of this review.
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