Five things you didn’t know about Account-Based Pensions

Recent Treasury information revealed that 84% of retirement savings is held in Account-Based (or allocated) pensions. Yet responses to a survey conducted by AMP suggested that 70% of over 50-year-olds do not understand what an Account-Based Pension (ABP) is. How can this be so? Is it possible that some retirees have ‘rolled over’ their super into an Account-Based Pension, but do not fully understand how such an account works? Yes, is the short answer. Many aspects of superannuation remain both complex and confusing. Today we are revisiting the topic of Account-Based Pensions and share five things that you may not know – things that may help you to better understand some of your own options when it comes to withdrawing funds from your own super account.

1. Limits on ABP deposits

There is a lifetime limit on how much superannuation you can transfer into a tax-free retirement account such as an Account-Based Pension. This is called the transfer balance cap and it is currently set at $1.9 million.

2. Minimum and maximum withdrawals

There are minimum drawdown rates – but no maximum. Once your money is in an ABP you will need to withdraw the government-mandated minimum percentage. You can withdraw more than this, whether in regular income or lump sums as there is no upper limit.

3. Your balance won’t necessarily reduce

Your balance may grow back beyond its starting point even though you are withdrawing. How does this work? Let’s say you withdraw the minimum amount for your age – say 65 – that will equal 5% a year. Say your balance is $200,000, you will withdraw $10,000 in the first year. But last year, if your fund performed in line with balanced funds in pension mode at 10.9% (as measured by Super Ratings), your remaining $190,000 would have earned $20,710 which is more than you withdrew. This is an aspect of super that many people overlook. They forget that their super continues to earn even after they have started drawing money down. And funds in pension mode generally  perform better than regular balanced funds in accumulation as there is no tax on the earnings.  

4. Centrelink declarations

Once you start an ABP you do not need to declare this income to Centrelink. What you do need to declare is the full financial asset – i.e. the money in this account. Centrelink will deem you to have earned a certain amount of income on this asset (see current deeming rates here) and these earnings will be added to your other income as part of your means test assessment. It is not unusual for people applying for an Age Pension to list both their super fund account balance AND their retirement income stream earnings and thus fail the means test, when they could and should have been eligible.

5. Good reasons not to move to an ABP

ABPs are not the answer for everyone. Generally for couples the total household assets and income are assessed even if only one member of the couple is applying for the Age Pension. The exception to this is if the younger partner is under Age Pension age and their super is still in accumulation mode.  In this case the younger partner’s super will be exempt from being assessed.  But if they move their super into an Account Based Pension deeming will apply.  This is called the ‘younger spouse’ rule and it is important to understand as it can mean that older partners can qualify for an Age Pension if both partners’ super accounts are treated differently. 

Should Sumalee start an ABP earlier than she planned?
Could this help solve her need for income…?

Sumalee is a 65 year old who separated from her husband five years ago. She has a daughter with a young baby who wants to move back home. Sumalee was waiting until she was entitled to an Age Pension, but now wants to leave work earlier to care for her grandchild so that her daughter can work without paying high childcare fees.

Sumalee has $250,000 in super and $25,000 in a term deposit account, a $20,000 car and $5000 worth of household contents. She owns her own apartment without a mortgage.

As with many other pre-retirees, she finds the rules very confusing. She assumes that she will get an Age Pension at 67 as she doesn’t have high assets. She thinks she wants to retire immediately but needs income to live on – about $30,000 per year is her rough estimate. 

Sumalee is interested in knowing how an ABP might work.

For instance, could she move to an ABP now, at age 65? And withdraw the $30,000 per annum for two years, then apply for the Age Pension and reduce the amount she is withdrawing to a minimum (say $5000 each year)? Are there tax advantages if she does this? 

There are quite a few questions here, so we asked Retirement Essentials adviser Nicole Bell to share how this might work for Sumalee over the next few years, and whether rolling over into an ABP is better than simply withdrawing lump sums along the way?

Nicole’s thoughts for Sumalee

As she is 65 Sumalee is able to set up an Account-Based Pension.

She can do so with exactly $30,000 per annum coming out, and she can choose regular fortnightly or monthly payments. This makes it easier to manage her cash flow as it is regular income coming into her bank account, as opposed to leaving the funds in accumulation where she would need to request a withdrawal when funds are required. It’s much easier to keep track of expenditure by managing funds through regular payments, particularly when moving into retirement when people often become more conscious of their spending.

The earnings on the funds in the ABP will be higher (for an equivalent investment option, say balanced) than if she was to leave the funds in accumulation. This is because some tax, of up to 15%, is paid on accumulation earnings, but in an ABP there is no tax on the earnings. For example, looking at the average earnings over the last 10 years for the ‘Balanced’ option of one of the leading industry funds in Australia, the average annual returns in accumulation were 8.6%, and in an Account-Based Pension were 9.48%. This is an additional 0.88% return per annum, which on a balance of $250,000 would be an additional $2,200 per annum (this assumes a flat balance across the year, so it is a very rough estimate).

After two years, assuming Sumalee’s Age Pension is approved, she can decrease what she is taking from super down to the minimum 5% per annum for her age. This will depend on the outstanding balance at the time, but if there is $220,000 left in super she would need to continue to draw $11,000 each year.

If she is eligible for a full Age Pension (which under current calculations she would be) she will be getting $29,000 each year in Age Pension entitlements so she may feel she no longer needs to draw from super regularly.

In this case some people choose to roll the balance back to the accumulation phase. That way they aren’t forced to take any money out if it’s not required (to comply with minimum withdrawals), and then they can leave the earnings to compound and grow as a nest egg for when it might be needed in the future.  Some people just leave the excess in their bank account.  

There is a strategy where you maintain two super accounts and take funds out and put them back in until age 75 when you can’t contribute anymore, but this is complex and administratively cumbersome so you may need further advice to decide if this is a useful strategy for you.

Regardless of whether Sumalee’s money is in accumulation or an ABP, because she is 65 she can choose to make lump sum withdrawals at any time if required.

In summary, an ABP is preferable in this scenario because the earnings will generally be higher, and a regular income makes it easier to manage spending in retirement than ad hoc withdrawals

What next?

If you are at the point of wanting or needing to withdraw a retirement income stream from your own super account, here is a short checklist to help you work through the necessary steps:

Practical steps to establish an ABP.

• Start by asking, why are you doing this? 

You may need ongoing regular income, or a short term top-up. Or you may have left work unexpectedly. There are many reasons you may wish to access super, so it’s important to take time to discuss the reasons why you need money, the best of the several different ways you might withdraw it and therefore evaluate if an ABP is actually the smartest option.

• Do you meet the rules?

You will need to be of Preservation Age and meet other requirements – it’s important to check that you comply 

• Check out your super fund and its offering

What does your super fund offer in the way of an ABP? Do they also offer free appointments so you can fully understand all options available to you? Remember, whilst it might suit your fund to keep you as a member by offering you their form of ABP, You don’t have to be defaulted into that particular option. It’s important to check other options as well.

It’s also a great time to review all your investment settings and risk settings

Whether you are about to move to an ABP or have already done so, it’s important to thoroughly understand all your options and which strategy best meets your current and future income needs. 

Read more about Account-Based Pensions here.

If you believe it would help you to know more about super a guided consultation with one of our experienced advisers will help you explore your income and spending needs.

What’s your experience?

Have you moved to an ABP?
Or is this not yet the right choice for you?

This article is provided by Retirement Essentials Representative Number: 001260855. We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859. This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.