What is an account-based pension (ABP)?

Retirement is when most of us look forward to having more time to do what we love.

That could be spending more time with family, focusing on a favourite pastime, or packing a bag and ticking off those dream destinations on your bucket list.

Having a regular source of income in retirement, such as an account-based pension, can offer financial security and peace of mind.

What is an account-based pension?

A (retirement) account-based pension (ABP) allows you to use some of your superannuation as a regular income stream while leaving the rest invested.

By transferring money from your super fund into an ABP, you can potentially earn tax-free investment returns while drawing income payments.

You can open an ABP when you reach a certain age, known as the preservation age, and the account can be structured to suit your financial needs.

What are the benefits of an account-based pension?

An account-based pension offers control over how you invest your retirement funds and the flexibility to choose how much and how often you want to be paid (within allowable limits).

You can access extra money when you need it and change your investment and payment options at any time.

Your super fund pays tax on the earnings within the fund. By transferring the super fund into an ABP, no tax will be payable on the earnings.

An ABP is also a tax-effective form of income when drawing funds either as a regular income stream or a lump sum from the age of 60, even if you return to work.

Self-managed super funds can claim an exemption for the income earned on pension assets, which is called an exempt current pension income (ECPI).

How does an account-based pension work?

You can transfer funds from your superannuation to the pension phase when you reach preservation age (between 55 and 60 depending on when you were born) and retire, reach age 60 or older and leave an employer, or when you turn 65.

There are reporting requirements to the ATO in relation to starting an ABP (known as Transfer Balance Account Reporting) and you are only allowed to transfer up to $1.7 million into an ABP (the lifetime limit).

There is no maximum pension payable for an ABP (e.g. the whole balance can be paid out) but there is a minimum amount of money that must be withdrawn.

The government has temporarily reduced the minimum drawdown rate as part of its COVID-19 pandemic relief measures. For the 2022-23 financial year the minimum drawdown is:

If the ABP minimum is not paid by June 30, the tax-free income status is lost.

Your ABP is also part of the income and assets tests, so it may affect your eligibility for the aged pension based on grandfathering rules.

How long does an account-based pension last?

It’s important to understand that an account-based pension is not guaranteed income for life.

Your payments will continue until the account balance runs out or you opt to close the account and take the balance as a lump sum.

Factors that affect how long your ABP lasts include the amount you transfer into your account, how much your investments earn, how much you take out in payments, and what fees you pay.

Any money left in your ABP after you die will go to your beneficiary as either a lump sum or as continued regular payments.

Need advice for your retirement?

Are your retirement savings working hard for you? Our experienced advisers and financial planners will help you make the most of your assets, personal savings, investments and superannuation to ensure you are financially secure during retirement.

Call LDB Group on (03) 9875 2900 or fill in the contact form below to speak with one of our financial planners about your retirement plan.