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The difference between account-based and government pensions

Decoding retirement income in Australia
Published 8 May 2024   |   4 min read

In Australia, there’s more than one retirement income option, and understanding the difference between account-based pensions and government pensions is crucial for planning a secure and comfortable retirement.

In this article, we will explore the differences between these two forms of income support, shedding light on how they work and how they can complement each other to provide a more secure retirement.

The major differences between an account-based pension and an age pension

Account-based pension  Age pension
Self-funded income established with your super savings  Government funded income that includes the age pension, veteran pension, disability support pension, and more 
You must meet your super preservation age, which varies depending on your birthdate but ranges from 55 to 60  You must have reached the age of 67 or meet the age requirement based on your birthdate. You should be an Australian resident and have a minimum of 10 years of residence in Australia. Your income and assets must align with the prescribed thresholds 
Flexible with the ability to choose the amount and frequency of payments, which can be adjusted to suit financial needs  Fixed with payments determined by a means test. The amount you receive depends on your income, assets, and relationship status 
You may be subject to tax if under the age of 60    The Age Pension forms part of your taxable income. If it is your only source of retirement income, you will pay no tax


Account-based pension (ABP)

What is an account-based pension?

Account-based pensions are also commonly referred to as allocated pensions or superannuation pensions. These are self-funded income streams that rely on the superannuation savings you have accumulated throughout your working years. To establish an account-based pension, you transfer a portion of your super savings into a separate account, from which you can receive regular payments into your bank account. 

Accessing your super 

To set up an ABP, you must meet your super preservation age, which varies depending on your birthdate. You can access your superannuation savings as a lump sum or convert it into an account-based pension, which allows you to receive regular payments, either as a lump sum or as income.  

Investment growth and risk 

With account-based pensions, your income can be influenced by the performance of your underlying investments. This means that while you have the opportunity for investment growth, you also bear the risk of market fluctuations. If investments perform well, your account balance can increase, providing you with more income. However, poor market performance may result in reduced income. 

Pension flexibility 

ABPs offer significant flexibility in terms of income withdrawal. You can choose the amount and frequency of your pension payments, which can be adjusted to suit your financial needs and lifestyle. Additionally, you have the flexibility to change your investment strategy within your ABP. 

Tax benefits of account-based pensions 

ABPs offer tax benefits, including tax-free withdrawals for individuals aged 60 or over. Under the age of 60, you may be subject to tax on your pension income. However, there are tax offsets and concessions to help reduce the tax liability. 

Senior man on camping trip working out his retirement income

Age pension

What is a government pension or age pension? 

In Australia, the government provides income support through various government pension programs, including the age pension, disability support pension, and more. These pensions are means-tested, meaning they are subject to an income and assets test to determine eligibility. 

Pension eligibility 

To qualify for government pensions, you must meet specific age and residency requirements. The most common government pension for retirees is the age pension, which provides financial assistance to individuals over a certain age (currently 66 years old, but it is increasing to 67 and beyond). Eligibility is based on your income and assets, and it's subject to regular assessments. 

Fixed pension payments 

Government pensions offer fixed payments, which are determined by a means test. The amount you receive depends on your income, assets, and relationship status. These fixed payments provide essential financial support, but they may not cover all your expenses in retirement. 

Regular assessments 

To continue receiving government pensions, individuals are subject to regular income and asset assessments. These assessments ensure that the support provided aligns with their current financial situation. 

Combining account-based and government pensions 

Many retirees in Australia choose to combine both account-based pensions and government pensions. This can provide a more stable and secure retirement income. Your superannuation savings can supplement government pension payments, in addition to other investments and savings, ensuring a more comfortable lifestyle throughout your retirement years.

Retired couple on a bush walk with their camping gear

Account-based pensions and the age pension serve different roles in Australia's retirement income landscape.

Account-based pensions offer flexibility and control, with the potential for investment growth and tax benefits. Government pensions provide a safety net for those who meet specific eligibility criteria, though payments are typically fixed and means-tested.

By understanding the differences between these two options, you can make informed decisions about how to structure your retirement finances and create a financial strategy that best suits your individual needs and goals.

Find out more about Australian Ethical pension options.    


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