What is an account-based pension in Australia and how is it taxed?
An account-based pension (ABP) in Australia is a retirement income stream converting superannuation savings into regular payments. For those aged 60 and over, payments are generally tax-free. Investment earnings within the pension account are also tax-exempt.
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How it works in practice
What is an Account-Based Pension?
An account-based pension (ABP), also known as an allocated pension, is a common way for Australians to draw an income from their superannuation savings once they reach retirement age and meet a condition of release. It allows you to transition from accumulating super to receiving regular payments while keeping your funds invested in a tax-effective environment.
How it Works
When you start an ABP, a portion or all of your superannuation balance is transferred into a dedicated pension account. You then receive regular, chosen payments from this account, typically monthly or quarterly. Your remaining funds stay invested, and their earnings continue to grow, helping to sustain your income stream over time.
Taxation of Account-Based Pensions
The tax treatment of an ABP is highly favourable, especially for those aged 60 and over. Payments received from an ABP are entirely tax-free. Furthermore, the investment earnings generated within the pension account are also tax-exempt, meaning there is no tax on the growth of your investments while they are supporting your pension payments. For individuals under 60, pension payments consist of a tax-free component and a taxable component, with the taxable component receiving a 15% tax offset.
Important exceptions
While generally tax-free for those over 60, there are exceptions. If you are under age 60, the taxable portion of your pension payments is taxed, though a 15% tax offset applies. The government’s Transfer Balance Cap limits the total amount you can transfer into tax-free retirement income streams; exceeding this cap can lead to excess transfer balance tax on earnings. Specific rules also apply if the pension is paid as a death benefit to a non-dependant.
What you should do now
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Understand your eligibility for an ABP by confirming you've met a condition of release, such as reaching your preservation age and retiring.
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Research different superannuation funds to compare their ABP product offerings, investment options, and fees.
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Determine your desired income stream amount, ensuring it meets the minimum annual payment requirements set by the government for your age.
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Seek professional financial advice to ensure an ABP aligns with your broader retirement goals and tax situation.
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Complete the necessary paperwork with your super fund to establish your account-based pension and begin receiving payments.
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