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After working for decades to build your superannuation, the day finally arrives when you can say goodbye to the nine-to-five and turn your super into a reliable source of retirement income. Depending on your account balance, a super pension can be used to supplement the Age Pension or replace it entirely.
The most common type of super pension, also known as a retirement income stream, is an account-based pension but there are other pension products which are outlined later in this article.
You can set up your account-based pension in a way that suits you, with the amount and frequency of payments a matter of choice, with one proviso.
There are no upper limits to how much you can withdraw but there are minimum annual payment amounts. For example, someone aged under 65 must withdraw 4% of their super pension account balance each year. The minimum increases incrementally until it reaches 14% a year for people 95 and older.
For more details see SuperGuide’s article on minimum pension payments, which includes a calculator to help you estimate how much you must withdraw.
There are also limits on how much you can transfer into retirement phase. The transfer balance cap is currently $1.6 million across all pension accounts you hold. If you exceed this cap you may have to remove the excess and put it in an accumulation account or take it out of super.
How do I start a super pension?
You can set up a super pension account with your current super fund or a different fund of your choosing.
You can also start a super pension from your SMSF which we cover in the SuperGuide article SMSFs: How to start a pension.
To be eligible to start a super pension you must have satisfied a condition of release (such as reaching your preservation age). If you are under 65 you must have retired from the workforce, but you can access your super without restrictions once you turn 65.
If you have more than one super account, it’s worth consolidating them into a single account before you retire because once you start a super pension you can’t add to it.
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 article Best performing pension funds over 5 calendar years (to December 2018).
- Research and choose an investment option. Most funds offer a default asset mix of growth investments (such as shares) and defensive assets (such as cash and bonds), or you may prefer to choose your own asset mix.
- 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 income stream). 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. There are complex tax considerations depending on who you nominate, so it may be worth getting independent professional advice.
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, 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 very basic standard of living.
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.
If you have more than $1.6 million in super, you can leave the excess in an accumulation account. If your pension account runs low, you can stop the pension, then start it again with top-up funds from your accumulation account.
Can I still get the Age Pension?
The short answer is, 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, currently 65 years and 6 months but gradually rising to 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.
Note: If you started your account-based pension before 1 January 2015 and already received the Age Pension, then only part of your pension income will be assessed under the income test.
Learn more about the Age Pension in the following SuperGuide articles:
- Case studies: How is the Age Pension assessed?
- Deeming rates for the Age Pension income test
- Age Pension calculator: How much could you be eligible for?
- How do I apply for the Australian Age Pension?
- Australian Age Pension rates (March 2019 to September 2019)
- How superannuation affects the Age Pension
- How does the Age Pension work bonus work?
- Am I eligible for the Australian Age Pension?
- Age Pension income test rules (July to September 2019)
- Age Pension assets test rules (July to September 2019)
- Retirement age calculator: When can you access your super or the Age Pension?
- What are the Age Pension residency requirements?
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.
Once you start drawing a super pension, both the earnings on investments in your pension account and the income you receive is tax-free from age 60. If you are aged 55-59 the taxable portion of your pension income is taxed at your marginal rate less a 15% tax offset.
Note: Transition to retirement pensions are taxed differently (see types of pension below).
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.
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 the market, 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.
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 pensions 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. (Older versions of account-based pensions called allocated pensions are mostly found in SMSFs these days and have minimum and maximum payments.)
Transition to retirement pension (TTR, also called TRIP or TRIS)
If you are under 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 only withdraw a maximum of 10% of your TTR account balance each year and payments are tax-free if you are over 60. If you are younger than 60, then the taxable portion of your pension income will be taxed at your marginal tax rate, less a 15% tax offset.
Learn more about TTR pensions in the following SuperGuide articles:
- Guide to transition to retirement pensions (TTRs or TRISs)
- Did tax kill the transition to retirement magic pudding?
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.
An annuity (also known as a lifetime or 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. You can buy an annuity from a super fund or a life insurance company with savings or with money from your super if you have reached your preservation age.
The main benefit is certainty; you are guaranteed a set income no matter how markets perform, which brings peace of mind.
The main drawback is a lack of flexibility; you can’t decide how your money is invested or withdraw lump sums. Depending on the product, they can be expensive and may not pay as much as a market-linked pension over the long term.
Learn more about annuities in the following SuperGuide articles:
- What are annuities, and will they work for me?
- Retirement income: When is the optimal time to purchase a deferred annuity?
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 generally 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.
For more information see SuperGuide article Reversionary pensions: What they are and how they work
Superannuation death benefit pension
Some funds allow your dependents 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. These pensions are relatively rare and more likely to be paid by SMSFs or older defined benefit funds.