Account-Based Pension

An account-based pension is the retirement-phase product your super transfers into when you stop working. The fund also calls it an allocated pension or a retirement income account. You choose how much to draw above the legislated minimum, how often you are paid, how the money is invested, and whether to take lump sums along the way. Investment earnings on the pension account are generally tax-free, and payments from age 60 are generally tax-free too.

The minimum drawdown scales with age. It is 4 percent of the account balance each 1 July under 65, 5 percent at 65 to 74, 6 percent at 75 to 79, and 7 percent at 80 to 84. From 85 it climbs: 9 percent, then 11 percent at 90 to 94, and 14 percent from 95. There is no maximum, but what you move into pension phase is capped by the transfer balance cap - a $1.9 million general cap, indexed in $100,000 increments. Once started, you generally cannot add money to the account.

Walk one year. You transfer $600,000 from accumulation into pension phase at 62 and choose monthly payments of $2,000 - $24,000 a year, above the 4 percent minimum of the 1 July balance. The fund invests the remaining balance in your chosen option, credits the earnings tax-free, and the next 1 July recalculates the minimum on the new balance. You can take lump sums at any time, and you can change the income amount whenever you like, as long as it stays above the minimum. The compound-interest entry covers what the earnings do over decades.

The tax layer is the reason the product is popular. From 60, payments from a taxed fund are tax-free, and the earnings inside the pension account are not taxed at all - a 15 percent saving on the accumulation phase for every dollar of return. What you move into pension phase is capped by the transfer balance cap: $1.9 million general cap, indexed. The balance above the cap stays in accumulation, where earnings are taxed at 15 percent.

The structural weakness is longevity. The account pays until it runs out: drawing more than the earnings, particularly early, depletes the balance, and a bad market in the first years compounds the damage because you are withdrawing from a shrinking base. An annuity is the guaranteed-income counterpart - less flexible, but it cannot run out. Run the trade-off through the minimum pension drawdown calculator and the pension vs lump sum calculator.

For an Australian reader, the account-based pension is what the super balance becomes on the day work stops. It is the product that turns four decades of compulsory deposits into a pay packet. MoneySmart's guidance is clear about both sides: flexible payments, tax-free earnings and lump-sum access on one side, no guaranteed returns and no guarantee it lasts on the other. Services Australia also counts the pension account in both the income and assets tests for the Age Pension - the drawdown rate interacts with the pension you may receive.

A colleague named Brent (yes, that Brent) retired at 61 and drew 8 percent a year through a rising market. The minimum felt too small, and then a drawdown arrived and the withdrawals ate a shrinking balance - sequence risk, paid in full. The highest-leverage thing most Australians can do is draw modestly above the minimum early and keep the earnings compounding. Run the whole picture through the retirement income calculator and check the minimums with the minimum pension drawdown calculator before choosing the drawdown rate.