Many retirees use their superannuation to commence a pension that pays income at regular intervals. The most common type of pension is an account-based pension. These are also sometimes referred to by their former name – allocated pensions.
Account-based pensions are a very tax-effective way of setting up super to provide a regular flow of income in retirement.
However, like anything to do with super, there are some hurdles that need to be cleared to ensure the efficient and compliant operation of a pension account.
Today, I will focus on the amount of income that needs to be drawn each financial year.
For an account-based pension to receive optimal tax treatment, a minimum amount of income needs to be drawn each year. This is based on a formula that varies with age.
When a pension first commences to be paid, and on 1 July each year thereafter, a percentage factor is applied to the balance of the pension account. The result is the minimum income that needs to be paid from the pension account in the coming year.
|Age on 1 July
|65 to 74
|75 to 79
|80 to 84
|85 to 89
|90 to 94
|95 and over
In simple terms, a 72-year-old with a pension account balance of $340,000 on 1 July 2023 will need to draw a minimum income of $17,000 in the 2023-24 financial year.
The maximum income is not capped, except for pension paid under transition to retirement rules where the pension income is capped at a maximum of 10% of the account balance each year.
If a pension commences part way through a financial year (i.e. other than on 1 July) the minimum income that is required to be drawn is pro-rated for the number of days in the financial year the pension is in force.
Taking our earlier example of a 72-year-old, if their pension commenced on 1 September 2023, the minimum income they will need to draw in 2023-24 is $17,000 x 303/365, or $14,112.
As a result of the economic turmoil that accompanied the recent global pandemic, the government reduced the minimum income to be drawn from an account-based pension (and certain other types of superannuation income stream) by 50% for the 2019-20, 2020-21, 2021-22 and 2022-23 financial years. Therefore, during these periods, a person aged between 65 and 74 only needed to draw an income of 2½% of their account balance to satisfy the prescribed minimum.
For any readers that had taken advantage of the lower minimum income requirement for the past 4 financial years, the discount was discontinued from 1 July 2023. Therefore, if you find you are being paid more income from your account-based pension than you need, it would be a good time to speak with a financial planner and discover the options that may be available to you.
By way of example, if you have been receiving income from your pension account of (say) $30,000 and this had been adequate for topping up your income needs, now having to draw an income of $60,000 may be more than needed. One option, particularly for many people under the age of 75, might be to simply re-contribute the excess income back into superannuation as a non-concessional contribution. However, before implementing specific strategies, seek appropriate advice.