Q&A: Account-based pensions

There are several possible income sources for funding your lifestyle after retirement. Find out how account-based pensions fit into the picture.

By Joel Atputharaj   - 3 min read

A little about Joel

Joel Atputharaj is a senior manager at Russell Investments. A Fellow of the Institute of Actuaries, he helps clients navigate complexity and has worn many hats across the superannuation and consulting businesses, including actuarial consulting, account management, insurance and fund administration.

Our superannuation expert Joel Atputharaj kicked off this short series on retirement income options with an outline of how the government Age Pension might fit into your financial planning for retirement. In this second Q&A, Joel explains how an account-based pension could be used to help fund your lifestyle after work.  

What is an account-based pension? 

An account-based pension is basically the opposite of a super account. Instead of ‘accumulating’ money through contributions and rollovers, it ‘pays’ you a regular income when you’re retired or transitioning into retirement to support your lifestyle. The rest of your account-based pension balance stays invested. 

What are the benefits? 

Flexibility is one aspect that members tell us they value highly. Your money isn’t locked away with an account-based pension. While they’re designed to pay you a regular income in retirement, you can also take out ad hoc amounts to cover big expenses. You choose how much, within limits. 

Your account balance remains invested and earning returns, which can help it to last longer. You can also access a range of investment options or strategies depending on your preferences and tolerance for risk.  

Account-based pensions also offer tax advantages, as the income payments you receive don’t attract income tax. There’s no tax on the investment earnings either if you’re fully in the retirement phase. That means your money isn’t getting eaten up by taxes, which can help it to last longer.  

When can you start an account-based pension? 

In general, from age 60, though special circumstances may apply.  

What rules should people be aware of? 

There’s a limit to the amount you can transfer into an account-based pension to get it started. This is called the transfer balance cap, and it’s currently set at $1.9 million.  

There’s a special type of account-based pension that allows you to keep working while you’re accessing your superannuation called a transition-to-retirement pension. You can only withdraw up to 10% of your account balance each year if you have a transition-to-retirement pension.  

With a standard account-based pension, there’s no upper limit to the amount you can withdraw but there is a minimum amount you need to take out each year. This minimum depends on your account balance and age.  

Are there downsides to account-based pensions? 

It really comes down to whether an account-based pension is right for you.  

There are tax advantages to having your money in an account-based pension but if you don’t need the income immediately, starting a pension and having to withdraw your money in line with the minimum withdrawal limits might be inconvenient. You might prefer to leave your super in an accumulation account. 

Retirement income from an account-based pension is not guaranteed to last as long you might need it to, but it can be managed so that you can increase the chances of making it last. How long an account-based pension lasts will depend on factors such as investment market returns, how much you draw down, and when you make the withdrawals. This flexibility can be a benefit but if you want greater certainty, you might consider an alternative such as an annuity.   

Annuities guarantee income for a set period, sometimes for life. These products also have downsides (for example, you give up some of your flexibility or the cost of purchasing such products) so it’s important to understand what you’re getting before you commit.   

Can people add more to their account-based pension? 

In general, you can’t contribute or ‘top-up’ an account-based pension that has already started. You can, however, close down one account-based pension and start a new account-based pension with any additional super savings you may have.  

iQ Retirement which is the flagship pension product of the Russell Investments Master Trust is unique, in that it has both a contribution account and an account-based pension drawdown account. This combination allows you to easily manage your super with the convenience of one account, where you contribute to the contribution account and withdraw from the pension account. 

That can be useful if you receive income from working after starting a pension or if you get funds from another source that you’d like to put into super—the sale of an asset or an inheritance, for example.  

What happens to an account-based pension when the person dies? 

Like super accounts, you can nominate a beneficiary to receive your account-based pension, otherwise the money in the account will go through to your estate.  

Where can people learn more? 

You can book a Retire Ready appointment to get personalised advice or look on our website for more information.   

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This communication provides general information only and has not been prepared having regard to your objectives, financial situation or needs. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation and needs. If you'd like personal advice, we can refer you to the appropriate person. This information has been compiled from sources considered to be reliable but is not guaranteed. Past performance is not a reliable indicator of future performance. To the extent permitted by law, no liability is accepted for any loss or damage as a result of reliance on this information. This material does not constitute professional advice or opinion and is not intended to be used as the basis for making an investment decision. This work is copyright 2024. Apart from any use permitted under the Copyright Act 1968, no part may be reproduced by any process, nor may any other exclusive right be exercised, without the permission of Russell Investments.