Account Based Pensions
"account based pensions have the ability to provide you with a tax effective income stream in retirement."
The information listed below is a summary and is intended to be of a general nature only. It does not take into account your individual circumstances or the specifics of your existing superannuation fund.
The below information is not intended to be comprehensive and we recommend that you seek professional advice that will take into account and address your personal circumstances.
As a consequence of the simplified superannuation reforms a new type of pension account became available to members of superannuation funds.
The pension is called an Account Based Pension (ABP). Its features include:
- The requirement to only draw a minimum annual income.
- No restriction on pension maximums or lump sum withdrawals.
- Pension payments may be varied between the prescribed minimum and the member’s full account balance.
- The income from the pension is tax-free to anyone aged over 60.
- Low cost to operate and manage.
Therefore an account based pension is a very flexible and tax effective income stream.
An individual may only access their full superannuation benefit upon meeting a condition of release. Common release conditions include:
- Permanent retirement after age 55
- Obtaining age 65
- Death or disablement
- Changing employers after age 60
Advantages of an account-based pension include:
- For those over age 60 the income from the pension is tax-free. Cash withdrawals from the pension capital are also tax free.
- No restriction on lump sum withdrawals.
- The payment each year can be varied between the minimum prescribed amount and full account balance.
- The capital underlying the pension becomes tax-exempt from both earnings and capital gains taxes.
- The assets underlying the pension grow free from capital gains tax (during the member’s lifetime).
- Franking credits may be refunded as cash payments to the SMSF.
- Prior to age 60, the pension income is eligible for a deduction based on the proportion of undeducted contributions within the pension capital.
- Prior to age 60, the net pension income (pension less deductible) is eligible for a 15% tax rebate.
However, disadvantages of an Account Based Pension are:
There is no guarantee how long the pension will last, as it is dependent on the level of the pension payments and the performance of the underlying investments. For a SMSF should the balance fall below $200,000 it may not be viable to continue the fund as accounting and compliance costs negatively impact the fund’s performance.
Varying Payment Amounts
Payment amounts are adjusted each year on 1st of July based on the member’s age and the account balance of the investment. At this time the member may determine their new pension amount for that year.
The pension scales for the life of the pension are:
Age Percentage of account balance to be paid as a minimum
|
55-64 |
4% |
|
65-74 |
5% |
|
75-85 |
6% |
|
85-95 |
10% |
|
95 and over |
14% |
Payment of Pensions
Pensions may be paid at any frequency the member requests. For example, weekly,fortnightly, monthly or by a single annual payment.
Estate Planning
An Account Based Pension can be established with a reversionary beneficiary. Upon the member’s passing the pension income automatically reverts to the reversionary beneficiary. Only spouses or children under age 25 are eligible reversionary beneficiaries. Otherwise the pension capital is paid as a lump sum. Depending on the category of beneficiary the payment, or part thereof, may be taxable in the beneficiary’s hands.
Further Contributions
A SMSF paying an Account Based Pension may accept further contributions from the member subject to legislative requirements and contribution limits. However, any new contributions are not added into the pension capital. Instead they form a new taxable accumulation balance within the fund. This balance is liable for earnings and capital gains tax.
However, on an annual basis, an existing Account Based Pension may be commuted (stopped) back to accumulation phase. The fund’s accumulation balances (pension and contributions) are then added together and the pension recommenced. In this way tax benefits accrue within the fund, as the taxable accumulations do not remain taxable for more than one year.
Tax Return
Where the member is aged over 60, income from an account based pension does not need to be reported on a member’s annual tax return. This is because the income is tax-free. Members under age 60 must report account based pension income.
Fund Liquidity
The annual pension is determined by the total value of the member’s assets. Therefore SMSF trustees should ensure the income from the fund’s assets is capable of meeting any pension payments. Due to liquidity requirements capital appreciation assets that generate little income may need to be reviewed once the SMSF has accrued pension liabilities.