What are the pros and cons?
Our co-founder, Jeremy Duffield, knows a thing or two or three about retirement income.
He’s also a ‘back of the envelope’ kind of guy, so is able to share his knowledge in short points and plain English. Which is a huge bonus for the team at Retirement Essentials.
This week he shared his insights on moving from an accumulation superannuation account to an Account-Based Pension. And how staying in accumulation too long adds up to a $1.2 billion loss for Australian retirees. Today we dig down into how timing your move from accumulation to ABP might save you about $1000 per annum. Read on to learn the pros and cons of this move, inspired by Jeremy and his plain English.
First, a refresher:
What is an accumulation account?
This simply refers to your superannuation when you are in saving mode, before you reach Preservation Age, when you can withdraw your funds as a lump sum or in a pension income stream.
What is an Account-Based Pension (ABP)
This is the most common way that Australian retirees ‘pay’ themselves. Having reached Preservation Age, they activate their savings, creating an ABP by completing the paperwork and nominating a fixed amount to be paid into their bank accounts at agreed intervals. Those who have reached Age Pension age often used this income stream to ‘top up’ their full or part pension entitlements.
What is the right time to activate an ABP?
There is no one right answer here. There are pros and cons to leaving your super in accumulation mode. And there are pros and cons to moving it into an ABP. Often, however, there is a net loss for those who wait too long to make the move to an ABP, as shared in Jeremy’s calculations above.
The table below has been created by our advice team to help you review all the detail of the upsides and downsides of starting an Account-Based Pension.
But the main upside for those who decide to move to decumulation is that there is no tax payable on investment earnings in an Account-Based Pension (provided it is not a ‘Transition to Retirement’ pension). The minimum withdrawal percentages (based upon age) have also been halved in recognition of special money market challenges during the current Covid Pandemic. So you are able to move to an ABP and leave most of your capital intact to continue to earn, without tax being payable.
As noted in the table below, those whose super is in accumulation can still withdraw lump sums (after preservation age) and these are tax free as long as your super fund is taxed. Centrelink may assess such withdrawals as income if you are an Age Pension recipient.
There is also a cautionary note below about insurance linked to your super. Any funds transferred to an income stream product will result in the cancellation of such insurance. It is important to consider your insurance needs, particularly in terms of debt or dependents, before making such decisions.
How do you get the timing right?
This is one of the more challenging decisions you will make, but the first step is understanding the pros and cons. Ensuring that you get the timing right will always be heavily dependent upon your own personal circumstances.
After reviewing the pros and cons, you may also wish to check your considerations and possible strategies with an adviser in a specific consultation. During this discussion they can help you assess your current situation (including tax rules) and compare it to a move to an Account Based Pension and how that could translate into a net loss or gain.
Pros and cons of leaving you money in accumulation super or taking up an Account-Based Pension
Leave your money in accumulation super and take ad hoc withdrawals
|No minimum withdrawal amounts. You control how much you want to withdraw and when||Investment earnings continue to be taxed at 15%|
|Lump sum withdrawals are tax free from age 60 from most super funds||You have to complete withdrawal forms every time you want to access your money and there is a waiting period before you get your money|
|You may be able to retain some life insurance if you need to do so to protect your family||Your balance is still exposed to some risk of going up and down depending on which investment option you choose|
|Centrelink may assess some withdrawals as an income payment|
Convert to an account based pension to generate an income
|Regular income payments. You can generally choose the amount and frequency of these payments||You have to withdraw the legislated minimum amount each year which can affect how long your money will last|
|Your payments at tax free from age 60 from most super funds||Your balance is still exposed to some risk of going up and down depending on which investment option you choose|
|If you are no longer working your investment earnings are tax free – this can be very beneficial||There is no life insurance available in an ABP – But you are also not paying for insurance you might not need|
|You can take out lump sums if and when they are needed. This could include the entire balance if you chose to do so||Your ABP balance will be included in the assets test and you will also be subject to deeming|
Moving from accumulation to regular income payments is a move most Australian retirees make in their retirement journey. Leaving the workplace can be challenging, so knowing you will receive a regular ‘pay check’ in retirement often helps make this transition seem much easier.
Beforehand, however, it’s best to thoroughly check your options and decide in an informed and measured manner. One of our advisers can help.