What is an Account-based Pension (ABP)?

What is an Account-based Pension (ABP)?

The key to all retirement income stream products is that they provide a convenient way for you to use your retirement savings to meet your ongoing living expenses. Under new rules, an account-based pension may also be referred to as a retirement phase pension (RPP). This is a superannuation investment which pays you a regular and tax effective income in retirement.

How do account-based pensions work?

Once you meet a full condition of release, you can roll money from your superannuation fund into the pension phase. The pension then pays you a regular income comprised of earnings and capital until your account runs out. With an ABP, you choose the amount of income that you draw from the pension each financial year, but you must draw at least the minimum prescribed amount, based on your age and account balance. The minimum percentages are shown in the table below:

pastedGraphic.png

You can withdraw a lump sum for any reason and at any time. You choose the underlying investments for your ABP. This means you choose the level of risk that suits you in investing your retirement savings. 

Temporary reduction to minimum pension drawdown in response to COVID-19

The government has temporarily reduced superannuation minimum drawdowns for ABPs and similar products by 50 per cent for 2019-20 and 2020-21 financial years. This measure will benefit retirees holding these products by reducing the need to sell investment assets to fund minimum drawdown requirements. 

The 50 per cent reduction applies to the minimum drawdown calculated on 1 July of the current financial year (or starting balance of the pension where it is commenced part way through a financial year).

Case study

Jack is aged 60 and commenced an ABP1 on 1 July with a balance of $500,000. He chooses to receive an annual payment of $20,000 which is above the minimum annual payment of 2% based on his age, that is $10,000. He informs the pension provider that instead of a large lump sum he would prefer a regular monthly payment, that is $1,6672 per month. 

Depending on market conditions and the underlying assets of his ABP, the balance of his pension will change over time. For example, if the underlying assets of the ABP grow by 5% and the minimum annual payment is 4%, the balance of his pension will increase by 1%. Similarly, where the minimum annual payment is greater than the return of the ABP, the balance of the pension will decrease.

 Over time, the minimum annual payment will increase significantly with age after he turns 85 and he is required to draw down a greater proportion of the ABP over time. Based on the Moneysmart account-based pension calculator, Jack’s ABP will run out by age 841.

  1. Moneysmart Account-based pension calculator, date of birth 01/07/1959, already retired, $500,000 balance, current super income of $20,000, medium pension fees, conservative investment option – https://moneysmart.gov.au/retirement-income/account-based-pension-calculator
  2. $20,000/12 = $1666.67 per month rounded to nearest whole dollar.

What are the tax advantages of ABPs?

  • Lump sum tax is deferred when you transfer superannuation money to an ABP or other retirement phase pension. Once you are age 60 plus, lump sum tax will be eliminated while you are alive.
  • No tax on earnings in the fund.
  • Little or no tax on the pension income. In fact, once you are 60 or more, you will pay no tax on this income.

Do ABPs have a Centrelink advantage?

If you are purchasing a new ABP it will be assessed by Centrelink under deeming rules. If you are invested in underlying assets that produce a higher rate you will earn more income than is included in your Centrelink income test. 

Some older ABPs are assessed under deductible amount rules which often resulted in even lower amounts of assessable income. The deductible rules only apply if you purchased the ABP before 1 January 2015 and have been in continuous receipt of an eligible income support payment since before 1 January 2015. 

The full account balance is an assessable asset regardless of the purchase date.

The things you should know before starting an ABP

  • To commence an ABP, you must have reached your preservation age and retired. 
  • The amount you can invest in an ABP is limited by the transfer balance cap. Currently the general transfer balance cap is $1.6 million (for 2020/21).
  • Your money may not last your lifetime. How long it lasts will depend on the performance of the underlying assets you’ve chosen to invest in and how much income you draw.
  • Your ABP may not form part of your estate as the fund trustee may be able to choose who to pay any death benefits to unless you have nominated a beneficiary under a binding death benefit nomination or reversionary pensioner nomination.
  • Beneficiaries who are not financially dependant on you may pay tax on the remaining account balance when you die.

Account-based pension pros:

  • highly tax effective,
  • may simplify estate planning,
  • regular income payments,
  • easy access to withdraw capital as needed, and
  • full range of assets in which to invest.

Account-based pension cons:

  • you must have met your preservation ages and retired to
  • commence a retirement phase pension,
  • your income may not last your lifetime,
  • must draw at least a minimum income each year,
  • maximum amount you can invest is limited by transfer balance caps, and
  • tax may be payable upon your death.

This information has been produced by Australian Unity Personal Financial Services Ltd (‘AUPFS’) ABN 26 098 725 145, AFSL 234459. Any advice in this document is general advice only and does not take into account the objectives, financial situation or needs of any particular person. It does not represent legal, tax, or personal advice and should not be relied on as such. Case studies are included for illustrative purposes only, are based upon hypothetical scenarios, and no inference as to the suitability of a particular strategy to any particular person or entity should be made. You should obtain financial advice relevant to your circumstances before making investment decisions. AUPFS is a registered tax (financial) adviser and any reference to tax advice contained in this document is incidental to the general financial advice it may contain. You should seek specialist advice from a tax professional to confirm the impact of this advice on your overall tax position. Nothing in this document represents an offer or solicitation in relation to securities or investments in any jurisdiction. Where a particular financial product is mentioned, you should consider the Product Disclosure Statement before making any decisions in relation to the product and we make no guarantees regarding future performance or in relation to any particular outcome. Whilst every care has been taken in the preparation of this information, it may not remain current after the date of publication and AUPFS and its related bodies corporate make no representation as to its accuracy or completeness. Published: July 2020 © Copyright 2020