Age Pensions vs Account Based Pension

As you approach retirement, understanding your options for generating income is crucial. The two most common sources of retirement income for Australians are the Age Pension and Account-Based Pensions. While both provide a source of income during retirement, they are fundamentally different in how they operate, their eligibility requirements, and the level of control you have over your funds.

In this post, we’ll break down these differences to help you make informed decisions about your retirement.

What is the Age Pension?

The Age Pension is a government-provided safety net designed to help older Australians cover basic living expenses. It’s available to those who meet specific age, residency, and means test criteria. As of now, the qualifying age is 67, but simply reaching this age doesn’t automatically qualify you. You must also pass both income and asset tests, which determine how much pension you’ll receive.

For single retirees, the maximum Age Pension payment is currently $1,116.30 per fortnight, which equates to $29,028 per year. Couples can receive up to $1,682.80 per fortnight, or $43,753 per year. However, these amounts can be reduced depending on your financial situation, meaning that the pension is not designed to fund a luxurious lifestyle. Instead, it serves as a safety net for those who might not have enough savings or superannuation to support themselves.

Understanding Account-Based Pensions

An Account-Based Pension, also known as an superannuation pension, operates quite differently. This pension is an income stream that you can set up using your superannuation savings once you reach preservation age, which is currently 60. The key distinction here is that this pension is not government-funded. Instead, it’s your money, and you have significant control over how it’s invested and how much you withdraw.

The income from an Account-Based Pension depends on the balance of your superannuation account and the performance of your chosen investments. There’s flexibility in how much you can withdraw, subject to minimum drawdown rates, which start at 4% for those under 65 and increase with age. However, there’s no maximum limit, so if you withdraw too much or if your investments don’t perform well, there’s a risk of depleting your account sooner than expected.

Key Differences Summarised

To help clarify, here are the main differences between the Age Pension and Account-Based Pension:

• Source of Income: The Age Pension is funded by the government, whereas an Account-Based Pension is derived from your superannuation savings.
• Eligibility: Eligibility for the Age Pension is determined by age, residency, and means testing. In contrast, an Account-Based Pension is available once you reach preservation age and retire.
• Control: With the Age Pension, the government dictates your income. With an Account-Based Pension, you decide how much to withdraw and how your funds are invested.
• Longevity: The Age Pension provides a guaranteed income for life, but an Account-Based Pension’s longevity depends on your management of withdrawals and investments.

Making the Right Choice

Choosing between the Age Pension and an Account-Based Pension isn’t always straightforward. Each has its own set of advantages and potential drawbacks, and the best option often depends on your unique financial situation and retirement goals. For many, a combination of both might provide a balanced approach, offering both the security of a government pension and the flexibility of managing your superannuation savings. It’s important to note that whilst it is the aim of many Australians to be self-sufficient in retirement, you should still review your eligibility for the Age Pension.

If you’re unsure which option is best for you, consider speaking with a financial adviser. They can help you develop a tailored strategy that aligns with your retirement goals, ensuring you have the income you need to enjoy your golden years with peace of mind.

Balancing Your Retirement Income Sources

One of the most important aspects of planning for retirement is finding the right balance between your superannuation and other retirement savings, and the Age Pension. For many Australians, a combination of the Age Pension and an Account-Based Pension can provide this balance.

Combining the Age Pension with an Account-Based Pension

If you’re eligible for the Age Pension, you can receive this government-provided income alongside withdrawals from an Account-Based Pension. This approach allows you to rely on the stability of the Age Pension while using your superannuation savings to maintain your desired lifestyle.

The key advantage of this combination is that the Age Pension provides a baseline of income, helping to cover essential expenses. On the other hand, the Account-Based Pension gives you the flexibility to withdraw additional funds when needed, such as for travel, home improvements, or medical expenses.

However, it’s essential to manage your withdrawals carefully. Withdrawing too much from your Account-Based Pension too quickly can reduce your future income, while drawing too little may mean you aren’t fully enjoying your retirement. Balancing these factors can help ensure that your savings last as long as you need them.

Tax Implications

Another crucial factor to consider is the tax treatment of these pensions. The Age Pension is tax-free, which means you won’t pay any tax on the payments you receive. This can be particularly beneficial if you have other sources of taxable income, as it allows you to maximise your tax-free threshold.

For Account-Based Pensions, the tax treatment depends on your age. If you’re over 60, income from your Account-Based Pension is generally tax-free, making it an attractive option for those looking to minimise their tax liability in retirement. However, if you’re under 60, some of your pension payments may be subject to tax, depending on your individual circumstances.

It’s essential to consider these tax implications when planning your retirement income strategy, as they can significantly impact how much money you’ll have available.

The Role of a Financial Adviser

Given the complexity of retirement income planning, many Australians choose to work with a financial adviser. A good adviser can help you navigate the various rules and options, ensuring that you make the most of your retirement savings and government entitlements.

A financial adviser can also help you develop a comprehensive retirement plan that takes into account your current financial situation, future goals, and potential risks. They can assist in optimising your investment strategy, managing withdrawals, and ensuring that your income lasts throughout your retirement.

Final Thoughts

Retirement is a time to enjoy the fruits of your labour, but it also requires careful planning to ensure that you have the income you need. The Age Pension and Account-Based Pensions each offer unique benefits, and understanding how to use them effectively can help you achieve a comfortable and secure retirement.

Whether you’re just starting to think about retirement or you’re already enjoying your golden years, it’s never too late to review your income strategy. By understanding the differences between the Age Pension and Account-Based Pensions, and how they can work together, you can make informed decisions that support your retirement goals.

Remember, every person’s situation is unique, so what works for someone else might not be the best option for you. If you’re unsure about your next steps, consider reaching out to a financial adviser who can provide personalised guidance based on your specific needs and circumstances.

Ally Wealth Management is the trusted ally in finance for Australians at home and across the globe. As both Australian expats and residents, the founders of Ally have a unique understanding of the common personal financial challenges faced.

Book your complimentary appointment with our team at Ally Wealth Management to discuss how we can help you to achieve your financial goals.

Ally Wealth Management Pty Ltd is a Corporate Authorised Representative of Sentry Advice Pty Ltd ABN 77 103 642 888. Sentry Advice holds an Australian Financial Services Licence (AFSL) No. 227 748.

General Advice Warning: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances, and objectives. We recommend you obtain professional financial advice specific to your circumstances.