Superannuation account types

We previously explained What is superannuation and Superannuation contribution types. Today we will go through the superannuation account types.

But before we begin, we need to learn two definitions – preservation age and condition of release.

Preservation Age and Condition of Release

Superannuation account types

There are 3 superannuation account types (and it’s possible to have multiple accounts):

• Accumulation account
• Account-based pension*
• Transition to retirement (TTR) pension*

* The word ‘pension’ means an income stream (i.e., periodic payments) to support retirement.

Accumulation account

Before preservation age, you will only be allowed an accumulation account, so if you are under 60 or have never converted your super to a pension account, this is the type of account you have.

Tax

An accumulation account is taxed at 15% on income and short-term capital gains (less than 12 months), and 10% for long term capital gains. Even at age 60 and older, investment earnings within an accumulation account continue to be taxed at these rates. It is only when you meet a condition of release and you elect to move to an account-based pension (the next type of account we will discuss) that you cease paying tax on your earnings within your super.

Besides tax within the fund the other way tax could be paid is on withdrawals in your personal tax, but after age 60, there is no tax to pay on withdrawals, and this is regardless of account type.

Access

You cannot draw from an accumulation account until you have met a condition of release (for example, retirement after preservation age, ceasing a gainful employment arrangement after age 60, or reaching age 65).

Contributions

You can continue to add both concessional contributions (CCs) and non-concessional contributions (NCCs) while your total super balance is under the Transfer Balance Cap (TBC), which is currently $1.9 million. Once you have reached the TBC, you can no longer add NCCs. You can only add CCs.

There are also age restrictions:

• after age 75, you can only add to super through mandated employer contributions
• after age 67, you can only add CCs if you meet the work test.

Account-based pension

The word pension simply means an income stream, typically for the purpose of retirement. There are many types of pensions, including the age pension (from the government), account-based pension (from your super), and defined benefit pensions (from an employer).

An account-based pension is a regular income stream bought with money from your super when you retire. However, it is not guaranteed income for life. The income stream is from money coming out of your account (hence the name ‘account-based’), so it can run out.

Tax

With an account-based pension, there is:

• zero tax on investment earnings (both income and capital gains)
• zero tax on the income you receive (if you are over 60), and
• zero tax on lump sum withdrawals.

With an account-based pension, there is zero tax to pay for decades of retirement.
This is why the main strategy for people approaching 60 is to pump as much money into super as possible.

How much can you put into an account-based pension

The Transfer Balance Cap (TBC) is a lifetime limit on the amount you can transfer into an account-based pension.

You can move up to the $1.9 million TBC of your accumulation account balance into an account-based pension once you have met a condition of release (e.g., retirement after preservation age, ceasing a gainful employment arrangement after age 60, or reaching age 65).

Once you have met a condition of release, you can choose how much you transfer in from an accumulation account up to the TBC. Anything over that must remain in an accumulation account (or can be withdrawn from super).

How to add money to an account-based pension

You can not contribute directly to a pension account. Contributions can only be made to an accumulation account, which you can hold in addition to a pension account. To add funds to an account-based pension, you either need to create an additional pension account or move your existing pension back to an accumulation account and combine it with any new money in the accumulation account and move that into a new pension account. The latter option is more common since it is simpler with one account and you save on account fees.

Just as with an accumulation account, you get to decide how it is invested through your super fund.

Access and minimum withdrawals

There is no maximum withdrawal – you can take as much as you want, but anything taken out to invest outside super will lose the zero-tax-rate environment of the account-based pension.

There is a minimum amount that you must draw out of an account-based pension each year, which is age-based, and starts at 4% for those under 65 years of age and increases with age. The percent is based on your balance of your pension account on July 1st of that financial year. If that is beyond what you need, you may be able to contribute it back in (depending on age and cap eligibility) or else you can invest it outside super, however, it will be in a taxable environment.

Interaction with the age pension

The total value of your account-based pension (not the specific amount withdrawn) forms part of the income and assets test for the age pension.

Transition to retirement (TTR)

If you have reached your preservation age (which is 60 for everyone from July 1, 2024) and are under 65 and still working (i.e., you have not met a full condition of release), you can transfer some or all of your accumulation account to a TTR pension account. If you have met a full condition of release, an account-based pension is a better option over a TTR pension because a TTR pension account is still taxed on earnings.

A TTR account is a pension account that allows you to start receiving an income stream from your super while you are still working, so it can supplement your income from your super, such as if you wanted to reduce your work hours. For example, you may reduce your work to a 4-day-week and draw the difference in take-home pay from your TTR account.

Being a pension product:

• You cannot contribute to a TTR account directly. But you can continue to contribute to your accumulation account while you are eligible to do so and move that into a new TTR account.
• You must draw down the minimum each year, the same as an account-based pension, but unlike an account-based pension, there is a maximum you can drawdown, which is 10% of the TTR account balance per year. Again, the percent is based on the balance of your pension account on July 1st of that financial year.

Before 2017, a TTR pension account was not taxed, but starting from then, it is taxed as an accumulation account, so there is no tax-benefit on earnings like with an account-based pension. Consequently, there is no limit on how much you can put into a TTR pension account.

TTR financial planning strategies

If this is the first time you are learning about these accounts, this might be a little over your head, but you can come back to read about it later on when you have the basics down. I might even end up moving this into a separate article.

These can also be used with an account-based pension.

• There is an interesting advantage where you can salary sacrifice into super to pay less tax on your income, while at the same time drawing money from your TTR account to live on, which is tax-free to withdraw if you are over 60. This is known as an ‘income swap’ strategy and can provide you with a return via tax deductions to boost your super.
• You can begin the recontribution strategy using a TTR account.
• You may be able to use it to reduce your super balance to below $500,000 to make catch-up contributions.
• You could reduce your total super balance below the $1.9m Transfer Balance Cap (TBC) to get more money in. If your total super balance is just below the TBC, you can contribute up to the full annual concessional contribution cap.
• You can even up yours and your spouses super by moving money from one and making a contribution to the other. This can work well with the above two strategies, as well as a strategy to reduce your super balance below the proposed $3m additional 15% tax on earnings by moving some of your super to your spouse.
• You could access some of your super to pay off debt, such as your mortgage to free up more of your income, or for an upcoming expense. Although if your earnings in super are higher than the mortgage interest rate after accounting for tax, it might be better not to pay it off. Also, you will be reducing your super balance, so take that into consideration too.

One thing to watch out for is that as soon as you meet a condition of release, your TTR automatically converts to an account-based pension. See more on this if you are approaching or in the 60-65 age bracket.

Summary and final thoughts

Accessing your super

Your super is ‘preserved’ (inaccessible) until preservation age.
Preservation age is 60 for those born after July 1, 1964, and it will be 60 for everyone from July 1, 2024.

Super can be fully accessed (called a ‘full condition of release’) for retirement purposes (i.e., not including hardship, illness, injury, or death) in one of three ways:

• reaching ‘preservation age’ and having retired;
• ceasing a gainful employment arrangement on or after the age of 60; or
• reaching 65 years of age, regardless of employment.

Once you have met a full condition of release, all your super becomes permanently accessible (unrestricted non-preserved). If you go back to work between preservation age and 65, that money remains fully accessible, but any new super contributions will require a new condition of release to access.

Super can also be partly accessed (called a ‘partial condition of release’) from preservation age if you did not meet the above conditions through a TTR pension, where you can get up to 10% of the balance per year.

Tax on withdrawal

If over 60, there is no tax on withdrawals.

Tax within super

This depends on the account that your super is in. There are three accounts.

• Accumulation account – the account you have before preservation age. It is taxed at 15% on income and short-term capital gains, and 10% on long-term capital gains.
• Account-based pension – the account you can move your money to once you meet a full condition of release. There is no tax on any income or capital gains.
• TTR pension account – a transition to retirement account, which is taxed as an accumulation account.

You can move to an account-based pension once you have met a full condition of release.

Whether to move to an account-based pension

Pension accounts (both account-based pension and TTR pension) have a minimum withdrawal amount, which is 4% p.a. for those under 65 and increases with age.

For most people, it is beneficial to move to an account-based pension as soon as possible due to the tax savings on your investment earnings.

If the expected earnings on your accumulation account is 8% p.a. and you are taxed between 10 and 15% on earnings (let’s call it 12.5% for simplicity), then you are paying about 1% p.a. in tax (on your total balance). By moving to an account-based pension, you are able to avoid that 1% p.a., which for $500,000 is a savings of $5,000 per year, and for $1 million is a savings of $10,000 every year.

However, due to the minimum withdrawal from an account-based pension, if you have reached the TBC ($1.9m) and can no longer recontribute whatever you don’t need, and if your taxable income outside super is over the tax-free threshold, moving to an account-based pension may result in more tax due to some of your super being withdrawn and in a taxable environment.

The other consideration for moving to an account-based pension is where there is an age gap between couples. The age pension income and assets test excludes assets in an accumulation account for those below age pension age. So, if an older spouse is eligible for the age pension, one way to reduce assessable assets to boost age pension entitlements is to move assets into the younger partner’s accumulation account and not shift that to an account-based pension.

If you meet the balance and age requirements to recontribute any excess withdrawals beyond what you need, and if there is no benefit for you with regard to the age pension entitlements, moving to an account-based pension is a no-brainer.

A quick note – a small part of the population has access to untaxed super funds or defined benefit super funds. If this is you, you need to spend some time learning about the nuances of those super funds and the account types as they differ from ordinary super funds in significant ways. You can contact your super fund to help you understand it. Alternatively, you could speak to an adviser who specialises in these, either from your super fund, or privately.

Other articles you may find useful

How to invest your super
How much to save inside vs outside super