Recent research from financial services provider, AMP, reports that 70% of Australians do not know what an Account-Based Pension is. We doubt this is the case with Retirement Essentials members, but it was a handy reminder that the complexity of many aspects of retirement income is daunting for most.
So today we are sharing a very basic ‘Explainer’ of the who, what, why, when and how of Pension Funds. We are also sharing the latest comparison of performance between retirement and accumulation accounts, across different settings, to provide a useful benchmark for your own returns. We are indebted to Joshua Lowen at SuperRatings for his insights and assistance with this information.
What are Pension Funds?
These funds can variously be referred to as ‘pension’ accounts, ‘retirement’ funds or ‘pension’ funds. They typically refer to situations where you are drawing an income from, rather than contributing to, a fund which was most likely your situation before retirement. They are also not really a fund, but typically a different type of account or arrangement within your super fund. The most common type of Pension fund is an Account-Based Pension. It is offered by most superannuation funds to members who have reached Preservation Age and thus can gain access to their super. They allow the members to access their retirement savings as needed but continue to earn returns on the money they aren’t using straight away.
Why would you start an Account-Based Pension?
There are significant tax benefits for members who invest their savings in this type of account. You can currently invest up to the Transfer Balance Cap amount of $1.9 million (which is indexed against the Consumer Price Index) in an Account-Based Pension and not pay any tax on the investment earnings. Withdrawals are also not taxed.
Requirements of members
Once you have ‘activated’ your savings in an account based pension, you are required to draw down a percentage of your account balance each year. This amount is determined by your age and currently ranges from 4% to 14% p/a.
How do I rate my returns?
As you can access the money in your account based pension at any time, the ups and downs of financial markets can, for some people, influence when, and how much, you withdraw. Knowing your fund’s return throughout the year can be very helpful. SuperRatings tracks the performance of all Pension funds performance and publishes the median performance estimates monthly. Below is an edited table which shows the performance of Pension funds, compared with funds still in accumulation, over the past month, year and 10-year periods.
Pension funds returns
| Option Name | Date | Monthly Return % | Rolling 1 Year % | Rolling 10 Year % |
| SRP50 Growth (77-90) Index | 31/8/2023 | -0.2 | 10.5 | 9.1 |
| SRP50 Balanced (60-76) Index | 31/8/2023 | -0.1 | 8.7 | 7.9 |
| SRP25 Conservative Balanced (41-59) Index | 31/8/2023 | 0.1 | 7.1 | 6.5 |
| SRP50 Capital Stable (20-40) Index | 31/8/2023 | 0.2 | 4.7 | 5.0 |
Accumulation funds returns
| Option Name | Date | Monthly Return % | Rolling 1 Year % pa | Rolling 10 Year % pa |
| SR50 Growth (77-90) Index | 31/8/2023 | -0.2 | 9.5 | 8.2 |
| SR50 Balanced (60-76) Index | 31/8/2023 | -0.1 | 7.5 | 7.1 |
| SR25 Conservative Balanced (41-59) Index | 31/8/2023 | 0.0 | 5.8 | 5.8 |
| SR50 Capital Stable (20-40) Index | 31/8/2023 | 0.2 | 4.3 | 4.4 |
Source: SuperRatings September 2023
You may have noticed that the Pension funds are showing slightly better returns when compared to the accumulation funds. According to Joshua Lowen, this is because:
‘Pension funds tend to provide a higher return than accumulation funds mostly due to the tax benefits. But funds do also adjust their investment strategies for pension accounts, so it’s not really possible to determine if the outperformance is due only to tax or not. Members should also note that in downturns where performance is negative, pension options often perform worse than accumulation options as they don’t receive the benefit of tax loss offsets.’
What else do you need to know?
Because your retirement savings remain invested under this system (even though you have begun to withdraw) it is important to ensure that you choose the right investment option for your needs. This should be done when setting up the account. These setting should be regularly reviewed. Joshua reminds retirees that funds will often provide tools and advice to support members in making this decision.
Are Account-Based Pensions the only super income streams?
Other retirement products such as annuities or lifetime income products can be used as sources of income in retirement. Such products can be beneficial under certain circumstances however they are also often complex. It’s smart to ask your fund if they offer them and whether they provide assistance to more fully understand any benefits and limitations.
Where to next?
In summary, you can switch to an Account Based Pension when
To do so, you must have:
- reached Preservation Age (usually 60) and
- meet the required conditions of release e.g. no longer employed or
- reached 65
This means you will no longer be taxed 15% on earnings in your account. The timing of this move will depend upon many other considerations. Paying less tax is attractive, but it’s not the only issue. When you start an Account-Based Pension – and how much you transfer in – will depend upon your overall financial situation, your work plans and any debt you still have.
Getting this decision right is the basis of a good start to your retirement. If you would like support to fully explore all of your retirement funding options, our advisers, Nicole, Megan or Sharon, can step you through all ‘need-to-know’ when you move from saving to drawing down.
Is a Pension fund for you?
Have you made the move from an accumulation fund to a retirement fund?
How did you approach this decision?
Any tips for those yet to do so?
Visit www.superratings.com.au for data and ratings information.
Our Understanding more about Super consultations can help you to get your head around it all.
How do I move my pension fund from existing AMP fund to a fund ranked higher for returns?
We had a financial planner before AMP shuffle in 2020 and since have been floundering.
Hi Joslyn, thank you for reaching out and sorry to hear of your situation. Fortunately we can help you with this process in our General Advice consultations, by helping you to understand how, why and things for you to consider. You can schedule one of these here. We look forward to meeting with you. Thanks, Megan
I have an Amp pension fund and so has my husband. For the year to today my return was 11.37% and his 10.99%. Perhaps you need to look at which investment options you are currently with and switch to ones giving a higher return. Of course the higher return, the higher risk, but I have basically been in the same investments for many years and I have accepted the risk which has not turned out to be a problem
Hi Frances, I am curious to know which AMP Pension Fund is able to provide you a return of more than 10% in the current climate when the return on Super Accumulation funds is going negative. The max return for any super fund at the end of last Fin Year i.e. June 2023 was 8.5%.
I would like to reply to Akshay Argawal, unfortunately I didn’t see his question until now. But first I wrote on October 12 and my rate of return was the year ended then, so not the financial year to 30/6/2023. I just went in and had a look at my return for that financial year and it was 14.78%. I am in AMP’s Signature Super Allocated Pension.
My mix is 10% Specialist Australian Small Companies, 60% Specialist Geared Australian Share and 30% specialist International Share. Now many would say my mix is high risk but I have been in the Geared for more than 10 years and I am quite comfortable with it. For this current financial year to today 2 May or 10 months the return is 15.47% or if you want the year ended 30/4/24 it is 12.76%. My husband has his own account in the same fund but with a slightly different mix, although the same 3 investments is 14.06% for last 12 months.
I don’t know where you got the maximum return for 2023 was 8.5% but I assume it was in the more conservative MySuper type funds. Many funds returned more than this especially ones with international share components because for the last year the Dow Jones returned 19.7%.
Most retirees are encouraged to go into relatively conservative funds and the rate of return reflects the lower risk. I have been retired since 2000 and have kept a close eye on my super and I usually make around 14% each year.