An account-based pension (ABP) is a popular retirement income solution in Australia. Its purpose is to offer individuals access to their superannuation savings.
It gives people the flexibility to access their superannuation at the same time allowing them to remain in control of their funds.
Understanding what it entails is useful as you near retirement age, as it will help you get the most out of your superannuation.
What Is an Account-Based Pension?
An account-based pension is a retirement income that converts superannuation savings into regular income after reaching preservation age.
It allows individuals to withdraw a portion of their super balance while the remaining funds remain invested and continue to grow.
How does an account-based pension work?
An account-based pension allows individuals to use their accumulated superannuation balance to provide them with regular income payments. Here’s how it works:
1. Converting super to a pension
This occurs when someone retires and chooses an account-based pension, transferring their entire superannuation balance into a dedicated pension account. The balance is then invested, allowing them to receive a pension income from it.
2. Income withdrawals
It gives individuals the freedom to choose how much they want to withdraw within the government’s limit. Typically, these payments are made monthly, quarterly, or annually.
3. Investment control
Generally, with an account-based pension, people can choose how their funds are invested. They can choose whether they want them in low-risk options, such as cash, or more aggressive options, like shares or properties.
4. Tax advantages
You may have an advantage on the income you receive from an account-based pension if you are 60 years or older. However, these advantages are not for those under 60; hence, they will be subject to tax, but they may receive a tax offset.
Advantages of an account-based pension
Setting up an account-based pension has a lot to offer individuals looking to retire, and with us are some of these advantages as follows;
1. Flexibility
One of the most interesting offers an ABP can offer an individual is the freedom to withdraw any amount at any time. One can adjust withdrawals to fit their lifestyle and financial needs.
2. Tax-free Income (for those over 60)
Individuals 60 years of age and older can withdraw income from their accounts for free without being charged any taxes. This makes it an excellent tax-efficient retirement income option.
3. Control over investments
An account-based pension gives individuals full control to choose their investments, which can potentially allow room for capital growth and better returns if their portfolio performs well.
4. Capital growth
An ABP gives individuals’ accounts room for capital growth since their funds remain invested, which can increase their balance as time goes by. This will provide a long-lasting retirement income stream.
5. Estate planning benefits
Are you worried about what will happen if you pass on and you have money in your account-based pension? The good news is that the funds are left to your beneficiaries, potentially without them having to pay taxes.
Account-based pension vs other pension options
There are many other options that individuals could use to access their super in retirement, and an account-based pension is one of them. Other alternatives include;
- Annuities
It is a fixed income stream that provides individuals with a guaranteed payment for a set period of life, offering less flexibility but more stability.
- Defined benefit pensions
It’s a pension based on a set formula, usually tied to an individual’s final salary and year of service, that provides predictable payments.
Note: unlike the provided options, an account-based pension has much more to offer individuals, from flexible withdrawals and investment choices to complete control of account withdrawals that members can decide on.
Conclusion
An account-based pension has lots to offer individuals looking to retire and gain control of their investments.
It is flexible and tax-efficient, enabling individuals to turn their superannuation savings into an income stream during their retirement period.
It allows individuals to control how much they can withdraw and invest, giving retirees the potential for capital growth.
If you are looking to open an account-based pension and have many questions, do not hesitate to call a financial advisor to help you make the best decision for your retirement income strategy.
