Starting a pension from your super

You can set up a super pension account with your current super fund or a different fund; the choice is yours.

You can also start a start a super pension from your SMSF.

To be eligible to start a super pension you must have satisfied a condition of release (such as being 60 or more and retired). You can access your super without restrictions once you turn 65 even if you are still working.

Before you start an account-based pension:

• Research pension products using comparison sites such as Chant West and SuperRatings. Read the Product Disclosure Statement for products you are interested in, making sure you understand the fees and features. See also SuperGuide’s Best performing pension funds section.
• Research and choose an investment option, or a mix of options, in the product you have selected.
• Work out how much income you want to draw in the first year, noting the minimum drawdown limit (and maximum if you’re starting a transition-to-retirement pension). Also account for any Age Pension you may be entitled to and other sources of income.
• Decide which bank account you want your pension paid into.
• Decide who you want to nominate as beneficiaries to receive any money left in your pension account when you die, or to take over as the new recipient of your pension payments (a reversionary beneficiary). Learn more about beneficiary nominations and tax on death benefits.

Do I have to take my super as a pension?

The short answer is no. There is nothing stopping you from withdrawing all your super as a lump sum on retirement, or even leaving your balance in the accumulation phase, although it’s not recommended.

Superannuation is designed to provide income in retirement to supplement or replace the Age Pension. If you withdraw your savings all at once and have no other sources of income, you may have to depend on the Age Pension, which provides only a basic standard of living. Choosing not to start a pension also means missing out on the tax-free investment earnings offered by these products.

Account-based super pensions also offer the flexibility to withdraw lump sums when needed to pay for big-ticket items like home repairs, a holiday, car or new appliances.

Can I still get the Age Pension?

It depends. You may be able to supplement your account-based pension with a full or part Age Pension once you reach Age Pension age, which is currently 67.

The amount of Age Pension you are entitled to is determined by an income test and an assets test, with your super pension balance counted as an asset. The balance is also subject to deeming under the income test. The test that results in the lowest Age Pension is the one that Centrelink will apply.

What are the benefits of a pension?

The main benefit of drawing an income from a super pension, rather than relying entirely on investments held outside super, is tax. Or rather, the absence of it.

Once you start drawing a super pension after age 60, both the earnings on investments in your pension account and the income you receive is tax free.

The other benefit of an account-based pension is flexibility. You decide how the money in your account is invested and whether to withdraw income monthly, quarterly, six-monthly or annually. You also have the option of withdrawing some or all of your money as a lump sum or rolling it back into an accumulation account.

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Withdrawing your super as a pension rather than a lump sum also allows your savings to keep growing inside super in a favourable tax environment.

What are the drawbacks of a pension?

The main drawback of an account-based pension is that investment earnings are not guaranteed and can fluctuate with financial markets, depending on the investment options you choose. If the market falls steeply, the requirement to withdraw a minimum amount each year effectively crystallises your loss.

And that leads to the biggest drawback of all; that your money may run out before you do unless you have other sources of income to draw on.

As a result, the temptation is to choose a conservative investment option in retirement phase, but it’s important to have a meaningful allocation to growth assets so your savings keep growing even as you withdraw pension income.

Types of pension

Most super pensions these days are account based, but there are other super pension products you may come across. Here’s a summary of the main types:

Account-based pension

Account-based pensions, as described earlier in this article, are so called because the pension is paid from a super account held in your name. For SMSFs with account-based pensions, the amount supporting the pension must be allocated to a separate account for each member.

Transition-to-retirement pension (TTR, also shortened to TRIP or TRIS)

If you are aged 60-65 and not ready to fully retire yet, but would like to access some of your super, a TTR pension may be the answer.

As they are not retirement products, they don’t enjoy the same tax benefits as pensions in retirement phase. Earnings on investments are taxed at up to 15% just as they are in a super accumulation account. You can withdraw a maximum of 10% of your TTR account balance each year and payments are tax free

Defined benefit pension

Unlike account-based pensions, defined benefit pensions pay a guaranteed income for life (and sometimes for the life of your partner if you die first).

Defined benefit pensions are gradually being phased out and typically only held by long-time members of public sector or corporate funds. If you are lucky enough to be a member of one, don’t let an adviser or anyone else try and talk you into switching it for another type of pension.

Annuities/lifetime and fixed term pensions

An annuity, or lifetime/fixed term pension pays a set amount of income for a set time. You can choose whether you want payments to last for your lifetime or a set number of years. There are also annuities where payments don’t start until you reach a certain age.

Annuities are offered by life companies while lifetime/fixed term pensions are provided by super funds. They operate the same way, but pensions can only be bought with super money while annuities can be bought with both super and non-super money.

The main benefit is certainty. You are guaranteed income for life or the term you have chosen and your money can’t run out before then.

In the past, the main drawback was lack of flexibility. You couldn’t decide how your money was invested or withdraw lump sums and it was possible to receive back less in payments than you invested if you passed away shortly after purchasing the product. Modern annuities and lifetime pensions have addressed most of these aspects, allowing you to choose how your money is invested and guaranteeing the return of your capital. Investing in one can also improve your Age Pension entitlement thanks to more favourable means testing rules.

An annuity or lifetime pension is often used in combination with an account-based pension to provide peace of mind that you won’t outlive your savings while also enjoying the added flexibility of an account-based pension.

Reversionary pension

Some super funds allow your beneficiary, typically your partner or spouse, to continue receiving your pension when you die. In other words, your pension ‘reverts’ to your partner.

You often need to name a reversionary beneficiary when you start an account-based pension. The benefit of doing so is that any money left in your pension account when you die can stay in the tax-free super environment and provide the certainty of ongoing income for your partner at a difficult time.

Superannuation death benefit pension

Some funds allow your dependants to receive your death benefits as a pension when you die. A death benefits pension is generally restricted to your spouse or partner, a dependent child under 18 or a disabled adult child. Child pensions are relatively rare and more likely to be paid by SMSFs or older defined benefit funds, but most large super funds will offer the option for a spouse to be paid death benefits as a pension.