Investment
Let’s Talk A simple definition of “invest” is to apply or use money with the intention of obtaining income or profit. Too often investing is
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value of the pension depends upon the investment returns of the investment options selected and the amount of income withdrawn each year.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.
Features
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 |
Under 65 | 4% |
65-74 | 5% |
75-79 | 6% |
80-84 | 7% |
85-89 | 9% |
90-94 | 11% |
95 and over | 14% |
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.
An annuity pays you a guaranteed income for a defined period of time. An annuity can be purchased from a superannuation fund or a life insurance company using your superannuation or other savings. Annuities are not as flexible as account based pensions as the income amount is generally set at the commencement.
Income is guaranteed to be paid over a specified period, regardless of the investment performance of the assets supporting the annuity. Therefore the investment risk for these types of products resides with the provider, and not the client.
In extreme circumstances there may be the risk that the provider does not have the capacity to meet its payment obligations. It is imperative, therefore, to invest funds with a provider that has a good record of financial stability.
The two types of annuities available are :
Lifetime annuities are payable until the death of the principle annuitant (Purchaser) or a reversionary annuitant (eg. Spouse) who is specified at the time of purchase.
Term certain annuities have a specified term, usually in whole years (10 years), agreed upon at the commencement of the annuity.
How to purchase an annuity
Annuities purchased with superannuation money must only be in the name of the person who owns the superannuation. Annuities purchased with ordinary money (ie. Non superannuation money) allows for the income to be paid to a single or joint recipients, thus allowing people to split their income for tax purposes. Annuities may also receive tax advantages.
Options
Annuities offer a range of options to choose from so that the investment is tailored to suit your needs. The option which is selected and the amount invested , will determine the amount of income you receive.
Typical options include:
Life time annuities, the term for which income is payable under the life time annuity is dependent on how long the annuitant lives. The purchaser therefore takes the risk that they may die earlier than the life expectancy tables predict.
The earlier death occurs, the lower the total income payments received will be. Life time annuities allow people to select a guaranteed payment period at the commencement of the annuity, usually in whole years for a maximum of 20 years, or life expectancy at commencement (whichever is lesser). This enables the purchaser of a lifetime annuity to obtain some protection against early death.
If the annuitant and any reversionary annuitant die prior to the end of this guarantee period, the present value of any remaining income payable until the end of the guaranteed period will be calculated and paid to the beneficiaries or the estate of the annuitant or reversionary annuitant. It may be possible for the annuity payments to continue until the end of the guarantee period.
If the annuitant and any reversionary annuitant die after the expiry of the guaranteed period, the annuity will cease and no further payments will be made.
Term certain annuities – as a term certain annuity has a guaranteed term selected at inception, no ‘guarantee period’ is required. If the annuitant and any reversionary annuitant die within the term selected, the present value of any remaining income payments until the end of the selected term will be calculated and paid to the beneficiaries or the estate of the annuitant and any reversionary annuitant. It may possible for the annuity payments to continue until the end of the guarantee period.
At the end of the fixed term, the annuitant has the option to rollover the RCV to another annuity, or to have the RCV paid out. An RCV from an annuity purchased with ordinary money is simply a return of the original capital used to purchased the annuity and is not taxed.
Centrelink treatment
Assets test
The account balance of annuities that have a term greater than 5 years is fully assessable under the asset test.
Complying annuities
Complying annuities refers to annuities which have met certain conditions. Depending upon which conditions have been met these complying pensions will be either 50% or 100% exempt from the Centrelink assets test. No new complying annuities have been available since 20 september2007, so the exemption only applies to older annuities that have been in force prior to September 2007.
Under the asset test, depending upon the conditions met there are two exemptions available:
The market value of the income stream is re-assessed by Centrelink on a bi-annual basis (unless income is paid annually, where the value is only re-assessed once a year) and then the 50% discount is applied.
Income test
Under the income test, the assessable income is dependent upon the term of the annuity which are divided in to two categories:
Long term annuities
For annuities that have a term of greater than 5 years, the assessable income is calculated according to the formula.
Income drawn – Centrelink deductible amount
Where the Centrelink deductible amount= Purchase Price- residual capital value- commutations
Relevant Number
The relevant number is either the term of the annuity or the longest life expectancy of either the owner or reversionary.
Short term annuities
Annuities that have term of 5 years or less are assessed as a financial investment under the assets test and are ‘deemed’ under the income test.
The current deeming rates effective as at 1 July 2018 are as follow:
Asset level | Single allowee/Pensioner |
First $51,200 | 1.75% |
Balance above $51,200 | 3.25% |
Asset level | Couple allowee/pensioner |
First $85,000 | 1.75% |
Balance above $85,000 | 3.25% |
Asset level | Non – Pensioner couple |
First $42,500 | 1.75% |
Balance above $42,500 | 3.25% |
Taxation Concessions available
Tax – free amount
The tax free amount is the income payment from the annuity that is not subject to tax. Tax free amount is calculated by using the following formula:
Tax – free amount = Purchase price – residual capital value
Relevant number
Purchase price = amount invested in the complying annuity
Residual capital value = amount to be returned to client upon maturity
Relevant number = client/spouse’s life expectancy
Risk associated with annuities
Taxation and legislative risk
Our information is based on current practice of government bodies such as Australian taxation office and existing legislation. As with most financial related matters, there is always legislative risk that the legislation or current government practices may be amended.
Liquidity and access to capital risk
Liquidity is the ability of an investment to be easily converted to cash with little or no loss of capital and minimum delay
In the case of immediate annuities, access to the capital is restricted.
Department of Veteran Affairs Benefit
The Following is a brief description of the Various DVA benefits available. This is not an exhaustive list, so Individual must seek advice from Centrelink/DVA on the benefits below and other benefits that they may be eligible for.
Pensions | General Explanation | |
Service Pension | DVA is the equivalent of the Centrelink age pension and is paid to veterans who have qualifying service | |
Currently paid to veterans age 60 (male) or to females depending on their Date of birth as shown below: | ||
Women born between | Eligible Age | |
1/7/43 – 31/12/44 | 56.5 | |
1/1/45 – 30/6/46 | 57 | |
1/7/46 – 31/12/47 | 57.5 | |
1/1/48 – 30/6/49 | 58 | |
1/7/49 – 31/12/50 | 58.5 | |
1/1/51 – 30/6/52 | 59 | |
1/7/52 – 31/12/53 | 59.5 | |
1/1/54 and later | 60 | |
Disability Pension | Paid to veterans, with qualifying service, with an injury or disease as a result of war rendered on behalf of Australia before 1 July 2004 | |
Entitlement is determined on a case-by-case basis by the DVA, depending On severity of the injury or illness | ||
Tax-free benefit veterans and partners can receive this pension in addition To the Age Pension (paid by DVA) provided they meet the age requirements. | ||
Partner Service Pension | Paid to partners and widow/ers of veterans receiving the service Pension or having qualifying service if the partners meet certain requirements as stipulated by the DVA | |
Invalidity Service Pension | Paid to veterans under the service pension age (see service pension above for details) | |
assessed by | Must be permanently incapacitated for work (as defined and the DVA), incapacity need not to be war-related | |
Tax exempt until veteran reaches service pension age | ||
Income support Supplement | Income and assets tested payment made to War Widow/er who has limited means and satisfies certain criteria | |
War Widow/ers Pension | Paid to widowed partner or an eligible dependant of a veteran Whose death is due to injuries and disease sustained as a result of War service or eligible defence service | |
Non-taxable payment | ||
Is counted as income of the income support supplement | ||
Pension may continue after re-marriage | ||
Allowances | Rent assistance, and remote area allowance are paid in association with other DVA payments | |
Other Benefits | See DVA website for other benefits |
Concession | General explanation |
Health Care | A broad range of health care and support services are available to eligible veterans and eligible dependants. These services include some general and specialist services. |
GOLD CARD: The Repatriation Health Card for all conditions enables card holders to access health care and associated services for all of their care and associated services for all of their health care needs (some health treatment limits apply) | |
WHITE CARD: The Repatriation Health Card for specific conditions enables card holders to access health care and associated services for specific service- related conditions. Some non-service related illnesses and disease may be covered. | |
Housing | The Defence Home Ownership Assistance Scheme provides a home loan subsidy scheme to veterans (and certain dependants) who have completed a qualifying period of service in the Defence Force. Length and types of service determines eligibility and entitlements under DHOAS. |
Sourced from the DVA website (www.dva.gov.au)
Payment Name | Income test | Asset test | Taxable |
Veterans Age Pension | Yes | Yes | Yes |
Veterans service pension | Yes | Yes | Yes* |
Partner service pension | Yes | Yes | Yes |
Income support supplement (ISS) | Yes | Yes | Yes |
Invalidity service pension | Yes | Yes | Yes** |
War Widows | No | No | No |
Disability pension | Yes+ | Yes+ | No** |
*except where the veteran receives an Invalidity Service Pension and the veteran and partner have not reached age pension age.
**except if the person is age pension age
+except for permanently blind pensioners who are exempt for the basic rate
The above information is based on our current understanding of the relevant legislation and departmental policies.
These policies are continually under review and we suggest you should confirm your entitlement with the relevant government department.
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Let’s Talk A simple definition of “invest” is to apply or use money with the intention of obtaining income or profit. Too often investing is
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