Understanding Account-Based Pensions
An account based Pension is a Flexible Tax- effective Retirement Income stream that represents the Income phase of superannuation.
Account-based Pensions provide flexible income payments and the choice of investment options. The value of the pension depends upon the investment returns of the investment options selected and the amount of income withdrawn each year. As a result, there are no guarantees of how long your account – based pension will last.
How to purchase an account based pension
Account-based pensions can only be purchased with superannuation money upon meeting a condition of release. The superannuation fund provides you with money which can be used to provide you with the regular income stream and the option of lump sum withdrawals (if allowable from the chosen product provider).
Taking an income stream from your superannuation fund generates tax benefits over the life of the pension. For persons age 60 or older, the income payments will be tax-free. For persons under age 60, a portion of the income payments will be tax free according to the amount of tax-free component, with a 15% tax rebate available to partially/wholly offset tax on the taxable portion of the income payment. Fund earnings and realised capital gains in an account-based pension fund are not taxed.
Account- based pensions provide the investor with various options. These include income level that can be varied from year to year. A minimum percentage is required to be drawn down (dependent upon your age).
The table below shows the minimum factors for account-based pensions.
Age of beneficiary
Minimum drawdown percentage
95 and over
Transition to retirement option
A transition to retirement pension (TTR pension) allows older workers to transition into retirement by accessing a superannuation pension.
It is possible for the people who have reached their superannuation preservation age (currently between 55 and 60 depending on birth date) to access benefits in the form of a restricted income stream (no lump sum withdrawals allowed) before a full condition of release is met.
The minimum annual pension payable from a TTR pension is 4% of the account balance with the maximum payment being 10%. The minimum and maximum pension limits are calculated at the beginning of the financial year ( or when the pension commenced if in the first year).
Once a full condition of release has been met, no maximum pension limit applies and lump sum withdrawals are allowed.
Earnings on money held to support a TTR Pension that commenced after July 1st, 2017, are taxed at a maximum of 15% as per a standard superannuation accumulation account. All other characteristics of a TTR account-based pension remain the same as a regular account-based pension.
Tax concessions available
When you commence an account-based pension the balance is split into a taxable component and a tax-free component. This is based on the split that was in your Superannuation account just before you commenced the pension.
All future pension payments, lump sums and death benefits are split in the same proportions. For example, if your account balance at commencement consisted of $80,000 taxable and $20,000 tax-free, then 80% of all pension payments, lump sum withdrawals and your final death benefit would be the taxable component.
The Balance Cap limits the amount of superannuation held in pension phase to $1.6 million per person. Pension balances and notional earnings in excess of the Cap can be subject to an excess transfer balance tax. Excess amounts can instead be retained in the accumulation phase where tax at 15% continues to apply or outside superannuation.
Deferral of lump sum tax
Some lump sum withdrawals for individuals under age 60 will incur lump sum tax. If you are able to defer taking a lump sum (by receiving pension payments instead) until you reach age 60, no lump sum tax is payable at that time.
Tax- free amount
For persons aged 60 or older, the income will be tax- free. For persons under age 60, the tax-free amount is the percentage of the income payment from the account-based pension that is not subject to tax. The tax-free percentage is calculated by using the following formula:
Tax-free percentage = tax-free component at commencement of the pension
total balance at commencement of pension
Tax-free amount = tax-free percentage x pension payment
15% tax rebate
A rebate of 15% is applied to the taxable income drawn from your account based pension if you are under age 60. The taxable income is the pension amount drawn less the tax-free amount as outlined above. To qualify, the income recipient must be at least age 55 or older.
The calculation to determine the amount of the rebate is listed below:
Rebate = (annual income payments less tax-free amount) x 15%
Centrelink Treatment of account based pensions
Account-based pensions are assessed under the deeming rules for the purposes of the Centrelink income test. This means the income assessment is calculated using an assumed rate of return (set by the government) against your account balance.
However, if you commenced your account-based pension before 1 January 2015 and have been continuously receiving a means-tested payment from Centrelink or Veterans’ Affairs (DVA) since 31 December 2014 your account-based pension may continue to be assessed under the previous rules. These rules may be more favourable for you as they only assess a portion of the income payments received. If you switch to a new pension provider or your Centrelink/DVA entitlements reduce to nil your account-based pension will convert to the deeming rules.
Regardless of when your account-based pension commenced, lump sums withdrawn do not count as income for Centrelink/DVA purposes but under the deductible rules these withdrawals reduce how much of each income payment is not assessable going forward.
The full account balance of an account-based pension is counted as an assessable asset.
Risks associated with account based pensions
Taxation and legislative risk
Our information is based on legislative practices of the Australian Taxation Office (ATO) and other relevant government bodies as they presently exist. As with most financially related matters, there is always a legislative risk that provisions may be amended.
Investment values and income payments risk
An account-based pension may contain a mix of cash, capital stable, diversified and specialist fund. The value of units in each fund may rise and fall, in line with the value of underlying assets as determined by market conditions.
Account-based pensions do not guarantee your pension payments will last throughout your lifetime. Essentially, the longevity of your account-based pension is determined by your investment earnings, which are determined by your investment strategy, the income you draw and any lump sum withdrawals you may make. Payments will only continue while there is a balance in the account.
At Retirement Services Australia, we give our customers all the tools and guidance they need to create an effective retirement planning solution, and we help you every step of the way. We employ retirement planning specialists who offer to help create financial strategies that will suit you for life. We work with you to solve the matters we have touched on in this article. Our traditional clients are delegators who want to know what, why and when things need to happen but prefer to engage experts to do this work on their behalf.