Tax free earnings and income in retirement.

When an individual meets a condition of release, they may be able to move their superannuation accumulation account into what is called an account-based pension.

An account-based pension allows the individual to invest their retirement savings and benefit from drawing from it without any tax consequences and not paying any tax on anything their fund earns. This is one of the big benefits of the Australian superannuation system which is to eventually have the ability to set an account-based pension up in retirement.

Now the government does place a few restrictions around these if you want the benefit of 0% tax, this is because they want to make sure the main purpose of these pension accounts are to provide for one’s retirement (not build wealth in a tax free manner to maximise your eventual estate value for example and never spend it).

One of the restrictions is there are minimum drawdowns. Essentially all this means is you need to take a minimum amount out of your account balance each year. For example if you are 65-74 at 1 July of the financial year, you need to take 5% of your account balance each year. This goes all the way up to if you are 95+ you need to take out 14% each year.

Another restriction is the amount of funds you can have in this 0% tax environment of an account-based pension. Currently for anyone commencing a pension this year, the maximum amount allowed to be transferred across is $1,900,000.

The government has brought these rules and more to encourage you to spend your funds in retirement (with minimum drawdowns being enforced), they have also brought the upper restriction of $1,900,000 as what they deem a “fair” amount of assets to provide for one’s retirement where they can access the 0% tax environment and anything above this amount will be subject to tax as their has been some super funds in the multi-millions of dollars which the chance they will actually be used for someone’s retirement is very unlikely.

There are a few other things to consider when setting up an account-based pension such as estate planning, Centrelink, reviewing the investments within the fund and any transaction costs to set one up. In summary though – they are one of the best tax effective (0%) investment vehicles in Australia right now.