Account Based Pension

An account-based pension is a retirement income product sold by Australian superannuation funds that converts a member's accumulated superannuation balance into a regular income stream, typically paid monthly, quarterly or annually, while the remaining balance stays invested. It is the most common way Australians draw down their retirement savings once they reach preservation age and retire, replacing the older and less flexible allocated pension and complying pension products that preceded it.

Unlike a traditional defined-benefit pension, an account-based pension does not guarantee payments for life from a pooled fund. Instead, the retiree's own account balance is drawn down over time, so the income is only guaranteed to last as long as the balance and its investment returns support it, a structure that shifts investment and longevity risk onto the member rather than the fund.

Picture a large bucket of money that was built up over a working life. An account-based pension turns that bucket into a tap that drains at a pace the retiree largely controls, within a government-set minimum. The tap keeps running as long as there is water in the bucket, which means the retiree, not an insurance company, carries the risk of the bucket running dry too soon.

The Australian government sets a minimum percentage of the account balance that must be withdrawn each financial year, scaled to the retiree's age: younger retirees must withdraw a smaller percentage, and the required percentage rises as the retiree ages, reflecting a shorter remaining life expectancy. There is no legislated maximum drawdown for a standard account-based pension, unlike the transition-to-retirement version of the product, which caps withdrawals at 10 percent of the balance per year while the member is still working and has not yet fully retired.

Income paid from an account-based pension is generally tax-free for members aged 60 and over, and investment earnings inside the pension phase are also tax-free, which is one reason the product is central to Australian retirement planning. For members between preservation age and 60, part of the payment may be taxable depending on the mix of taxable and tax-free components in the original superannuation balance, a distinction that can materially affect take-home income for early retirees.

• The member chooses how the remaining balance is invested, from conservative cash and bond options to growth assets such as shares and property.
• Because the balance is market-linked, poor investment returns combined with the mandatory minimum drawdown can erode the balance faster than expected, a risk often called sequencing risk.
• Many retirees blend an account-based pension with the government Age Pension once their balance falls under the relevant means-tested thresholds.

An account-based pension offers flexibility and continued investment exposure but carries longevity risk, the risk of outliving the balance. A lifetime annuity transfers that risk to an insurer in exchange for giving up control of the capital. Financial advisers in Australia often recommend blending the two, using an account-based pension for flexibility in the earlier years of retirement and an annuity or the Age Pension as a longevity backstop for the later years, when the risk of outliving savings becomes more pressing.

Because an account-based pension's remaining balance typically passes to a nominated beneficiary rather than through the standard will and probate process, keeping the beneficiary nomination current is an important and sometimes overlooked part of broader retirement and estate planning in Australia.

Superannuation funds charge ongoing administration and investment fees on an account-based pension balance just as they do during the accumulation phase, and because these fees compound against a balance that is simultaneously being drawn down, comparing fee structures between providers remains worthwhile even after a member has already moved into retirement, not just while they were building the balance.

Members are generally able to withdraw a partial lump sum from an account-based pension in addition to their regular income payments, useful for a large one-off expense such as a major home repair, though doing so reduces the remaining balance available to fund future income payments for the rest of retirement.