Retirement pensions in Australia – are you across them all?

A regular income in retirement can be comforting, particularly if you’ve gotten used to a regular income after many years of working.

What a lot of people don’t know is that the government’s Age Pension (if you’re eligible for it) isn’t the only pension that may provide this. There are other retirement pensions, which allow you to receive what you’ve saved in super as ongoing payments. 

These pensions may provide greater flexibility and tax benefits once you’ve retired - and in some cases even before you’ve retired too. 

Here are some of the common retirement pensions in Australia:

• account-based (or allocated) pension
• transition to retirement pension
• fixed term or lifetime annuity
• the government’s Age Pension.

An account-based (or allocated) pension allows you to withdraw a regular income from your super savings when you’ve reached your preservation age (which will be 55 to 60 depending on your date of birth).

You need to have retired permanently, unless you’re 65 or older. After age 65 you can start drawing down your super through an account-based pension regardless of your work status.

How much can you withdraw from an account-based pension?

There’s a minimum amount you need to withdraw each year (4% - 14% depending on how old you are), but there are no withdrawal limits. That means you can take out extra income payments or lump sums as and when you need to. 

The money you receive will also depend on what you’ve saved in super.

What are the tax benefits?

The income you receive from an account-based pension is tax free from age 60. Up to age 60, a 15% tax offset applies on the taxable amount of your account-based pension income.

Do you still earn returns with an account-based pension?

Like your super account, this money stays invested, so you’ll have investment options you can choose from based on what works for you. 

Another benefit is the investment earnings from an account-based pension are tax free (this also means the tax benefits by moving your super into an account-based pension are generally better than if you leave it sitting in your super account). Remember though, market movements may affect any returns you might receive.

Is there anything else you should know?

There’s a limit on what you can transfer into an account-based pension (it’s called the transfer balance cap) and it can increase in line with inflation. Currently, the cap is up to $1.9 million, depending on whether you’ve already started a pension. 

You can check out your transfer balance cap info via your myGov account.

CFS offers this type of pension as the next step in your super journey. And, we’re one of the largest providers of this type of pension in Australia.

A transition to retirement pension (or TTR) allows you to access some of the super you’ve saved through regular payments, even if you’re still working and receiving an income.

With friendship, fulfilment and financial gains motivating many Australians to remain in the workforce for longer, a TTR pension could provide flexibility - but won’t be for everyone.

How does a TTR pension create flexibility?

You may be able to work less, or work the same hours while contributing more money into your super. 

Your TTR pension may allow you to do this as the payments you receive from it could make up some (or all) of the reduction in your take home pay.

Where might benefits exist?

A TTR could create tax advantages because there’s a 15% tax offset on the taxable amount of your income from a TTR pension up to age 60. 

Then, when you do turn 60, any income you receive from a TTR pension is tax free.

Therefore, you don’t need to draw as much as the extra amounts you may be salary sacrificing into super to end up with the same amount in your pocket. 

Can you still earn returns on this money?

Like your super, this money stays invested – and you’ll have investment options you can choose from. 

Any earnings you do receive (which will depend on how markets are performing) will still be subject to a 15% tax rate, like your super.

How much can you withdraw from a TTR pension?

There’s a minimum amount you need to withdraw each financial year, which will depend on your date of birth. The maximum TTR pension withdrawal limit is 10% of your account balance on 1 July each financial year. Remember, the money you receive will depend on what you’ve saved in super.

What age do you need to be to set up a TTR pension?

If you’ve reached your preservation age, which will be 55 to 60 (depending on your date of birth), you may be able to set up a TTR pension with your super fund. 

What happens to your TTR pension if you stop work?

When you turn 65 or tell your super fund you’re retiring permanently, your TTR pension will convert into an account-based (or allocated) pension, keeping in mind the transfer balance cap that applies.

Note, CFS offers TTR pensions but not every super fund does.

An annuity is a product that pays you an income stream for a guaranteed period. They can be purchased with your super savings or ordinary money.

If you’re purchasing an annuity with your super, similar to an account-based pension, you generally need to have reached your preservation age and have retired. 

How do super annuities work?

When you purchase an annuity, you can choose whether the annuity is paid for a fixed term or for the rest of your life. 

At the same time, you can also choose whether payments will be guaranteed. If you choose guaranteed payments, you can then elect whether they will be fixed, increase by a fixed percentage, or in line with inflation. 

How do share market returns impact an annuity?

You don’t need to worry about share market returns if you buy an annuity that pays a guaranteed level of income each year.

However, some annuities are market linked and don’t pay a guaranteed level of income. If you purchase one of these annuities, your annuity payments may change from year to year depending on what the annuity is invested in and how those investments have performed. 

What’s the difference between an annuity and an account-based pension?

Annuities are generally considered less flexible than account-based pensions as you can’t vary your payments if your circumstances change. Some annuities also limit lump sum withdrawals (including after your death).

Also, unless you purchase a market linked annuity, you cannot choose how your money is invested. The annuity provider will generally invest your money in secure lower-risk investments that may pay lower returns.  

How does an annuity impact your Age Pension?

Where an annuity satisfies certain specific rules, they can attract social security concessions which means only a portion of the purchase price and income payments will count towards the income and assets tests that apply to the Age Pension. 

Where do you get an annuity?

Annuities can be purchased directly from a life insurance company or via some super funds.

However, due to the complexity of these income stream products, many people access them with the help of a financial adviser.

CFS offers annuities but you will need the help of an adviser to set one up.  

The Age Pension is a government benefit paid to you once you reach your Age Pension age, which will be between 65-67, depending on if you’re eligible.

How do you know if you’re eligible for the Age Pension?

Eligibility comes down to age, residency and income and assets tests set by the government, which change periodically. For more on Age Pension eligibility, check out our guide to eligibility, rates and benefits. 

Did you know eligibility can change?

One thing that comes as a surprise to many self-funded retirees, who may not be eligible for the Age Pension straight away is that they may be eligible later (when their super and savings reduce).

Age Pension payments may also be payable on top of other money you might receive from part-time work (under the Work Bonus) as well as other savings and investments.

Where can you go to get help?

There are lots of rules tied to the Age Pension. If you want some help, we’ve teamed up with Retirement Essentials to give you access to their Age Pension Eligibility Calculator.

This can help you work out if you’re eligible for the Age Pension (or Commonwealth Seniors Health Card), and how much you may receive.