An account-based pension is a popular way for Australians to manage their retirement savings.
Investing your super in a pension rather than taking it as a lump sum can make your retirement savings go further.
A pension is a special investment ‘structure’ with tax advantages created by the government to help people manage their super savings in retirement. By investing your super and any other retirement savings in a pension, you can access your money as a regular income in a tax-effective environment.
Help your retirement funds go further
You can invest in the same assets, such as cash, shares or property, inside or outside a pension. The difference is that the government provides tax savings on investments inside a pension as an incentive to convert your super into a regular income stream to support you in retirement, rather than take it as a lump sum.
The lower tax rates mean the same investment in a pension will go further than if invested outside a pension.
Tax savings on investments inside a pension
All investment earnings in a pension are tax-free
This means you could be better off than:
- keeping your money in super, where investment earnings are taxed at 15%, or
- taking your super as a lump sum and putting it in the bank, where you’ll pay personal income tax on any investment earnings.
Tax free income and withdrawals if you’re over age 60
- If you’re age 60 or older - your pension payments and any lump sum withdrawals are tax free.
- If you’re between preservation age and age 59 - a portion of your pension payment is taxed, but you may be eligible for a 15% tax offset, reducing the amount you have to pay.
Assumptions: Investor is age 60 and invests $450,000 for retirement, drawing an income of $40,000 in the first year that increases by 3% pa. Retirement funds earn 8% pa in both the pension and outside of the pension.
Keeping control over your money
Unlike super, where you must keep your money invested until you retire, when you invest in a pension you get the tax benefits and you’re free to withdraw at least $2,000 whenever you want, including cashing in your entire pension at any time.
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