An account-based pension is a type of retirement income stream created by converting superannuation savings into a pension account. Retirees draw regular payments from this account to fund their lifestyle, while the remaining balance stays invested. The pension continues until the account runs out or the retiree passes away.
Payments are flexible, but government rules set a minimum withdrawal percentage each year, based on the retiree’s age. This makes account-based pensions one of the most common and versatile ways Australians use superannuation in retirement.
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From a technical perspective, account-based pensions are established once an individual meets a condition of release, such as retirement or reaching age 65. Investment earnings and withdrawals from the account are generally tax-free once the retiree is over 60. However, balances are subject to the transfer balance cap, which limits how much can be moved into the retirement phase.
The account remains invested across asset classes such as shares, bonds, or cash. Withdrawals and market performance affect how long the pension lasts, so strategies often balance income needs with preserving capital. Retirees may combine an account-based pension with other sources such as annuities or government pensions for greater stability.
Relevance
- Provides flexibility in retirement income management
- Offers tax advantages compared to other investment income sources
- Allows retirees to keep funds invested while drawing income
Applications
- Drawing regular income after converting superannuation at retirement
- Customising payments above the minimum requirement for lifestyle needs
- Managing investment exposure while in retirement
- Combining with Age Pension or annuities to diversify income sources
Metrics
- Account balance growth or depletion over time
- Investment performance relative to chosen strategy
- Compliance with minimum withdrawal percentages
- Sustainability of income based on life expectancy and spending patterns
Issues
- Withdrawals that are too high can quickly deplete savings
- Market downturns may reduce the longevity of the pension
- Dependence on investment performance creates uncertainty
- Breaching transfer balance cap rules can result in tax penalties
Example
A retiree with $700,000 in superannuation opens an account-based pension at age 65. They draw the minimum annual payment of 5% to cover living expenses, while the balance remains invested. Over time, investment growth helps extend the life of their retirement savings, providing a sustainable income stream.
