How and when should you commence an income stream from your super as you move towards retirement?
Starting an Account-Based Pension (ABP) is a major step in anyone’s retirement journey. Getting the timing right is very important. So too is judging the appropriate amount of money you will withdraw. Knowing that this process is not set in stone comes as a great relief to many retirees. Hence today’s explainer on the four key questions to consider when starting an ABP. And the four key things that you will need to know if you wish to reverse this action at any time.
Estimate your needs
Start by defining how much income you’ll need in retirement. Next split this into non-negotiables (fixed expenses) and negotiables (discretionary). This will help to identify what your retirement salary needs to be, and which sources are available to fund – in short, where it will come from.
Will you get an Age Pension?
Next step is to determine your eligibility for Age Pension benefits. We can help estimate Age Pension benefits based on commencing an income stream with your super or retaining it in what’s called accumulation phase (where you aren’t drawing regularly from it). Depending on your age and your partner’s, if you have one, the assessment by Centrelink can vary.
How much top-up will you require?
Knowing how much your Age Pension benefits are likely to be will provide the baseline for your retirement salary. Next consider how much more income you will need (from other sources) to reach your total retirement salary needs. This could be made up of a few things depending on your circumstances: interest on your savings, some casual work, rent from investment properties or regular withdrawals from your superannuation.
How long will this money last?
It’s now time to examine how long your super might last or how these income sources may change during your retirement. This is to give you confidence that you can live the retirement you have been working so hard to finally enjoy!
The actual process of establishing your Account-Based Pension is undertaken with your super fund, although you do not have to automatically sign up for their suggested ABP or retirement income stream. You can research the various offerings and choose to move your super to whichever Account-Based pension suits your needs best. There are many comparison sites to help you research this need. You will need to nominate the size and frequency of your payments and how you would like this money to be invested. You will also need to observe the minimum drawdowns rates set by the Federal Government.
What can go wrong?
This comes back to the timing of the move to an Account-Based Pension. Again, there is no right or wrong answer here, but sometimes both members of a couple will start an ABP – and then learn that they could be penalised if the younger member didn’t really need to do this.
Here’s how this aspect of the super rules works.
Sonya and Steve
Megan recently met with Sonya who is 66 and Steve who is 60. They have both retired and had already commenced income streams from their super accounts, because they heard this was an easy way to fund their retirement. But they were concerned about how long their super might last. Due to their age differences, it was determined that if Steve had left his super in the accumulation phase, Sonya would be eligible for $720 per fortnight in Age Pension payments plus, of course, a Pension Concession Card. This compared with no eligibility if Steve kept his income stream open. Megan was able to show Sonya and Steve how they could increase their Age Pension benefits by nearly $19,000 per annum. This simple adjustment to their situation also meant their savings would last at least 6 years longer than they originally thought.
How do you reverse an Account-Based Pension?
The conclusion was that Steve should move back from the decumulation or pension phase of super to an accumulation account to change the joint asset amount being evaluated by Centrelink.
There are two main ways of doing this, but it will depend upon the value of the Account-Based Pension and how this affects Age Pension calculations.
Steve can close his ABP and place the funds in a new accumulation account
OR
Steve could leave his decumulation account open, withdraw most of the funds in a lump sum and use this to start a new accumulation account. This strategy is fine, but one that could be more useful for a couple who are closer to the maximum Age Pension entitlement.
Remember, moving money back to accumulation requires that the account holder needs to open a new superannuation account with a provider. You can’t just roll back automatically, so this means a new application form etc. It’s important to check with your superfund if you are contemplating this so that you receive all the information that you will need.
(However if you still have an existing accumulation account for some reason, then you can close the ABP and just roll your money over to that existing account. It’s best to speak with the relevant super fund on what is needed to complete this transaction.
Warning – don’t do this!
It’s important not to withdraw the money into your bank account, to then transfer into super. This would result in the need to meet a contributions limit condition, because the money has now been moved outside the superannuation environment.
If you would like to check your situation or to ask questions about your own particular needs, an Understanding Super consultation will allow you to model all types of retirement income stream scenarios as well as find out how long your savings are likely to last.
What’s your opinion?
Recent research from AMP suggests a majority of retirees do not understand how Account-Based Pensions work. Is this because they are complex? Or is it because people have saved maximise their balance and are yet to tackle the challenge of actually spending this money?
Are you saying that Centrelink would totally ignore any, possibly large, amount then held in the superannuation accumulation account (or accounts if you have more than one account and regardless of the total amount) and then, due to a remaining smaller discretionary amount or amount left in the ABP with a reduced income stream at the Govt’s required minimum draw-down rate being much less, you would get a full or part pension depending on the level of the ABP drawdown? Really?
Hi Bronte, thank you for seeking further clarity! It is true that if your partner is under Age Pension age AND their super in still in accumulation then it is exempt from asset testing. However the AND is the key part, both conditions must be met. As soon as they either turn of age or convert the account into an ABP then it becomes assessable. In the scenario you have put forth where a younger partner has both accumulation and an ABP only the ABP will be assessable, not the accumulation account.
Does the story and calculations of Sonya and Steve take into account the different tax treatment of superannuation earnings in an Income pension account ( tax free) v’s Accumulation account where they incur a level of tax .
Hi Trevor. Its a great question and yes the tax tretement was taken into account. As you pointed out there are tax advanategs in an account based pension where the earnings are tax free versus an accumulation account where earnings incurr a 15% tax rate. Despite this Sonya and Steve were far better off as the increase in Sonya’s Age Pension entitlement of $19,000 p/a far outweighed the tax on Steve’s super.
What age can someone draw down from superannuated funds
Hi Colin, thanks for seeking further clarity! There are a number of different superannuation products and each has their own terms and conditions regarding when and how you can access the money. It would be best to contact your superannuation fund to get the best answer.
hi can i transfer super from my super to my wifes super as i am pention age and she is not and how do i do it
Hi Steve, Thanks for your question. It may be possible to move some super into a younger spouse’s name but depends on your circumstances such as age, previous super contributions, current super balances, estate planning intentions, and also weighing up the pros and the cons of the different tax rates depending on what you would otherwise do with your super. I would recommend you book a Strategy Consultation, we can discuss both the short and long term implications of moving the funds (if possible) by estimating any potential entitlements benefits, weigh this against the other considerations, and also take a look at your situation long term to ensure your strategy is sustainable through retirement. The strategy consultations costs $330 and go for just under an hour, this is usually enough time to work through your questions about the type of strategy you are considering which should help you go ahead with any of the changes you want to make with confidence that you’re taking the right actions. You can book the appointment by clicking here. Best wishes, Nicole.
Is it true that if someone doesn’t transfer to a tax-free account based pension then the money in the super accumulation account is included in the deemed income that affects the amount of pension that they get? – And that putting the super money into an account based pension means this isn’t included in a person’s deemed income?
Hi Stephen, thanks for seeking the truth on the matter. Centrelink will deem your super to earn income either way, whether it is in accumulation or pension phase. Both types of super are assessed as assets based on the total balance and then have income deemed to be earnt on that balance using the same deeming rates either way.
Hi Stephen, thanks for your question. The answer is a little different depending on what the deemed income may be included for. When determining your potential age pension entitlements there is both an income test and an assets test. Deemed income from super will be calculated the same regardless of whether it is in an account-based pension or accumulation account if you are over age pension age. This may not be the case for super held in the name of a spouse under age pension age when it comes to calculating the older spouse’s pension entitlement.
To further make the matter confusing, if you are thinking about the income test for the Commonwealth Seniors Health Card then only the account-based pension would be deemed regardless of age. So we would need to know a little more about your situation before we could give you a clear answer on this one. To discuss your individual situation in more detail I would recommend a General Consultation – we can discuss how all of this works and could apply to your situation, and discuss the pros and cons of making any changes of the back of this to determine whether any benefit would exist in making changes. You can book a consultation by clicking here. Best of luck, Nicole.
I am 64 and single. I own my property and keep little in my savings.
I’m medically disadvantaged. Centrelink have me on jobseeker. I was doing voluntary work past 4 years up to Dec 2022. I no longer can do that. Centrelink are now provided medical certificates 3 monthly. Centrelink advised me to apply for DSP in early 2022. I speak with Centrelink regularly. I have provided all the required information. I am still waiting. I have been withdrawing from my accumulation fund several times yearly. This helps with medical expenses and general bills. Can I move a small amount from accumulation to ABP income stream and keep my PCC card and Centrelink payment. Currently, my accumulation is not counted as I am under 67.
Hi Geoffrey, thank you for seeking further assistance. If you take some of your super out of accumulation and into an ABP, the amount that you put into your ABP will become assessable as an asset and as such may impact the amount of Age Pension you are eligible to receive.
Hi Thanks for the article. In the scenario you have posted if Sonya had already turned 67 and applied for the pension and lets say received some part pension. If Steve then rolled his ABP back to accumulation would centrelink still change their assessment once this change had been completed and updated
Hi Mike, it’s Sharon here. great question! Superannuation is exempt for anyone under Age Pension age if it is in Accumulation. It loses it’s exemption if in an income stream, commonly called an Account Based Pension (ABP). If Steve is under Age Pension age, and rolls his income stream/ ABP back to accumulation, there is no longer any income stream. Once the processing is completed by the super fund and statements issued which show no ABP anymore, then the super in Accumulation is exempt by Centrelink until Age Pension age. This also means no deeming applies of this exempt asset until Age Pension age.
If I rolled my ABP back into accumulation or just withdraw everything into my bank account and have the total balance being deemed instead of the ABP balance being deemed plus having to receive the min pension payment that goes towards the income test for age pension, this will in a way allow me to receive more age pension? As it excludes the min payment now. If I need money I can just withdraw from super or bank account instead.
Hi Jay, thanks for the comment. It’s hard to determine a clear answer without a detailed run down of your situation, however I think the confusion often comes in with the income test and ABPs. Whatever income you choose to draw regularly from the ABP, whether it is the minimum or a higher amount, is irrelevant to your income test assessment. The balance of the ABP is deemed for income test purposes, and therefore moving the funds to accumulation or to a bank account would result in the same age pension assessment (there are exceptions to this but they only apply to someone who already had both an ABP established prior to 2015 and has been in consistent receipt of an income support payment since this time. If this is your situation you need to seek further financial advice before making any changes). Hope this helps, Nicole.
Thanks James great article.
Like Sonya & Steve in article both, my wife and I have separate ABP’s in place and both receive income streams.
My wife is not at Age Pension age till 18mths after I receive an Age Pension.
My ABP started April 2014….my wife’s ABP started June 2016
If my wife now roles back her existing ABP back into Accumulation account before I apply soon for an Age Pension, I understand from article and comments above that her $’s in her Accumulation account won’t be included in under Assets in my application for an Age Pension.
My question is if this role back occurs will it be an issue for Centre Link as it is within the “5 years” of myself applying for an Age Pension?
And Centrelink may ignore rolled back and add her $’s back in under Assets in my application?
Brad
Hi Brad, no Centrelink will not penalise you for your wife only have recently moved the money back into accumulation. They wouldn’t even necessarily know that the money was previously in pension phase.