When you retire and reach preservation age, you don’t have to withdraw your super as a lump sum — you also have the option to commence an account-based income stream. This can be a flexible and tax-effective way to fund your retirement.

But there are plenty of rules around account-based income streams, including when you can start one and how much you’re required to withdraw each year. Below, we run through some of the key questions you might have.

Note: This article refers to retirement phase account-based income streams, rather than transition to retirement (TTR) income streams, which cannot be cashed out as a lump sum and do not require you to be retired (though you will need to have reached preservation age). TTR income streams are also not tax-exempt while in the pre-retirement phase.

First of all, what is the accumulation phase?

As the name suggests, the accumulation phase is where your super sits during your working years, steadily growing to provide you with enough funds to meet your needs during retirement.

Most employer and voluntary contributions are taxed at a flat rate of 15%, so long as they do not exceed the concessional contributions cap (currently set at $27,500 in FY 2022-23).¹ Earnings in accumulation phase accounts are also taxed at 15%, which is lower than the rates most taxpayers would be looking at had they invested their money outside of super and in their own name.

How do account-based income streams work?

Once you reach preservation age (between the age of 55 and 60 depending on when you were born), you can choose to commence an account-based pension. This takes the super you’ve saved over the years and converts it into an income stream to help fund your retirement.

Your super fund can continue to invest your money, meaning your savings have the potential to keep growing depending on how the market performs. During this time, you won’t be charged tax on any investment earnings on funds in your account.²

You can select how often you’d like to receive payments (monthly, quarterly, half-yearly or yearly), as well as how much you’d like to withdraw each financial year (subject to the minimum drawdown requirements).

Just keep in mind that if you withdraw too much your super may not last as long as you had originally planned. And if you withdraw too little you risk running afoul of the minimum drawdown rules, which can result in your super pension losing its tax-free status.

What are the minimum drawdown rates?

The minimum drawdown rates are based on your age and your account balance on 1 July, with rates currently set at 4% for under 65s and rising to 14% for anyone aged 95 and above.³

When do I switch to an account-based pension?

To commence an account-based pension, you’ll have to meet a condition of release. This usually means:

• You have reached your preservation age and retired
• You have ceased an employment arrangement on or after the age of 60
• You are 65 years old (even if you haven’t retired)
• You are temporarily or permanently incapacitated
• You are suffering severe financial hardship
• Your super fund deems it appropriate on compassionate grounds (such as to pay for medical treatment or funeral expenses)
• You have a terminal illness or injury.

There’s no requirement that you switch over to an account-based pension once a condition of release is met. You can keep your super in accumulation mode, or even have a pension and an accumulation account running simultaneously.

Avoid going over the Transfer Balance Cap

The Transfer Balance cap is the limit on how much super you can transfer into the retirement phase of your account. It applies to all retirement phase income streams (including death benefits you take as an income stream) across all super accounts.

The Transfer Balance Cap is set at $1.9 million for the 2023-24 financial year, but depending on your circumstances, yours might be lower.

If you exceed your personal Transfer Balance Cap, you might have to reduce the amount you hold in the pension phase (such as by transferring it to an accumulation account or withdrawing it completely from your super) and pay excess transfer balance tax.

How does the Age Pension fit in?

Assuming you meet the eligibility requirements, you can receive the Age Pension in tandem with an account-based pension. If you do this, the balance of the latter will be treated as an asset under the Age Pension asset test and will ultimately affect how much Age pension you are entitled to.

As for the income test, the amount that Centrelink will assess depends on when your account-based pension commenced.

If it started before 1 January 2015, Centrelink may only assess a portion of your annual income payments (assuming that grandfathering rules apply).

If it started on 1 January 2015 or after, your account-based pension will be treated as a financial asset and deeming rules will be used to calculate the income it generates. For example, single Australians will have the first $60,400 of their financial assets deemed to earn 0.25%, while anything over $60,400 will have a deemed rate of 2.25% applied.⁴

Sources

1 https://www.pbo.gov.au/about-budgets/budget-insights/budget-explainers/how-super-taxed

2 https://www.ato.gov.au/individuals/super/withdrawing-and-using-your-super/retirement-withdrawal—lump-sum-or-income-stream/ 

3 https://moneysmart.gov.au/retirement-income/account-based-pensions 

4 https://www.servicesaustralia.gov.au/deeming?context=22526