Turning Your Nest Egg into an Income Stream 🥚
Once you retire and meet a condition of release, you don't just get a giant pile of cash. You need a way to turn that lump sum into a regular, tax-effective income to pay for your living expenses. The most common way to do this is by moving your super from an "accumulation account" into a retirement account, often called an account-based pension or allocated pension.
This article provides a general overview for informational purposes only and is not personal financial advice.
How Does an Account-Based Pension Work?
Think of it like this: your super fund has been in an "accumulation" phase your whole working life, where its only job was to grow your money. When you retire, you switch it to the "drawdown" phase.
- Transfer: You transfer the money from your super accumulation account into a new pension account. This money remains invested in the market, just like your super was.
- Regular Payments: You choose how much you want to be paid and how often (e.g., fortnightly, monthly, or annually). This becomes your new "salary" in retirement.
- Minimum Drawdown: The government sets a minimum percentage you must withdraw each year. This percentage increases as you get older. The purpose is to ensure you are actually using the money for retirement, not just as a tax shelter.
- Flexibility: You can usually make additional lump-sum withdrawals if you need to, and you can choose how the money in your pension account is invested.
What are the Key Benefits?
The main advantage of an account-based pension is tax.
- Tax-Free Investment Returns: Any earnings (capital growth or income) generated by the investments inside your pension account are completely tax-free.
- Tax-Free Income: For most people, all the income payments you receive from your pension account after age 60 are also tax-free.
This tax-free environment is a significant incentive designed to support retirees. It allows your retirement savings to last longer than if they were invested outside of the super system.