Accumulation Phase vs Pension Phase

An individual’s superannuation balance can either be held in Accumulation Phase, Pension Phase, or a combination of the two.

Understanding the difference between Accumulation Phase and Pension Phase within superannuation (including SMSFs) is important, as the tax treatment, administration, regulatory requirements and available strategies vary between the two.

Generally, an individual who has not yet reached their superannuation preservation age, will have their total superannuation savings in Accumulation Phase.

A person who has reached their preservation age has a lot more flexibility as to how much they will hold in Accumulation Phase versus Pension Phase. This is usually determined by personal income needs and tax-effective retirement strategies.
 

Accumulation Phase Versus Pension Phase

 

What is Accumulation Phase?

 
Accumulation Phase is the place superannuation savings are held while a person is working and accumulating wealth for retirement.

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An accumulation account is able to accept super contributions from an employer, business, or the individual member themselves.

For members who have met a full superannuation condition of release, withdrawals from Accumulation Phase can be made. Otherwise, savings within Accumulation Phase are inaccessible.

All earnings received from the invested balance within Accumulation Phase are taxed at up to 15%.

However, where a capital gain is made from an investment that was owned for longer than 12 months, a 33% assessable capital gain discount applies, effectively reducing the capital gains tax to 10%.

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What is Pension Phase?

Pension Phase has two parts: Account Based Pension Phase or Non-Commutable Account Based Pension Phase.

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Account Based Pension Phase

To commence an account based pension, an individual uses all or some of their accumulation account to start the account based pension. This can only be done if the member has met a full superannuation condition of release.

The maximum that can be used to commence an account based pension, known as the Transfer Balance Cap, is $1.6 million (indexed). The cap was put in place from 1 July 2017 to limit the tax-free earnings available to wealthy individuals. Any superannuation savings in excess of the Transfer Balance cap therefore needs to be retained in Accumulation Phase, or risks incurring excess Transfer Balance Cap tax.

A member is required by law to drawdown an income of at least 4% of their account based pension balance each financial year. The 4% calculation is based on the balance at 1 July of each year, or pro-rata in the first year of the pension (if a part year).

The minimum account based pension drawdown percentage increases each year as the member’s age increases, as follows:

Age of Member Drawdown Percentage
Under 65 4%
65-74 5%
75-79 6%
80-84 7%
85-89 9%
90-94 11%
95 and Over 14%

All earnings received from the invested balance within Account Based Pension Phase are completely tax free, regardless of age.

Non-Commutable Account Based Pension Phase

A Non-Commutable Account Based Pension (NCAP) is more commonly known as a Transition to Retirement (TTR) Pension or Transition to Retirement Income Stream (TRIS).

Similar to an Account Based Pension, an individual uses some or all of their accumulation account balance to start a Non-Commutable Account Based Pension.

Unlike an Account Based Pension, a member is not required to meet a full condition of release to commence a Non-Commutable Account Based Pension. This type of pension can be started by anyone after they have reached their superannuation preservation age.

Also, the amount used to start a TTR Pension does not count towards the Transfer Balance Cap.

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It is possible for an individual to commence a Non-Commutable Pension while they are still working. In fact, that’s what it was intended for.

As part of the NCAP regulations, a member is required to draw an income of between 4% and 10% of the account balance each financial year, as calculated on 1 July of each year.

All earnings received from the Non-Commutable Account Based Pension balance are taxed in the same manner as Accumulation Phase (see above).

Non-Commutable Account Based Pensions can be tax-effective when used as part of a salary sacrifice pension strategy.

Once the member reaches age 65, the Non-Commutable Account Based Pension can automatically convert to an ordinary Account Based Pension, due to ‘age 65’ satisfying the requirements of a full superannuation condition of release.

 

Pension Phase Minimum Withdrawal

 
The Pension Phase minimum withdrawal rules, as detailed in the table above is designed to ensure that members do not retain too much wealth in tax free Pension Phase that could otherwise be used as a vehicle for accumulating wealth without paying tax or spending within the economy.

You can use this calculator to calculate your minimum pension payments.

By increasing the superannuation Pension Phase income rates within each age bracket, more and more super savings are removed from Pension Phase into an individual’s personal bank account or investments, and used to cover living expenses.
 

Roll Back Pension to Accumulation

 
At any time, an account based pension or non-commutable account based pension can be rolled from Pension Phase back to Accumulation Phase and be held in an accumulation account.

If this is done, no further pension payments will be received, as the balance will be in Accumulation Phase and all earnings will once again incur tax of up to 15%.

Once in Accumulation Phase, all or some of this balance can be used to re-commence a new pension at some time in the future.

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The roll back or commutation of an account based pension to Accumulation Phase will reduce the amount previously counted towards the Transfer Balance Cap. If only part of the account based pension is rolled back, the amount counted towards the Transfer Balance Cap will reduce proportionately on a percentage basis.

A rollback from Pension Phase to Accumulation Phase within a self managed superannuation fund (SMSF) is generally easier that an industry or retail superannuation fund, provided it is running a pooled investment strategy, as it only needs to be reflected in the supporting paperwork; whereas a rollback from Pension Phase to Accumulation Phase in a retail or industry super fund often requires a new account.

Chris Strano

Chris Strano created SuperGuy to help the average punter navigate through the complex and ever-changing super rules. It has since become one of Australia's leading digital super resources. If you’re looking for more personalised advice, have a chat with one of our experts at www.superguy.com.au/need-advice

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6 Comments

  1. Ari metaxas

    Hi Chris,

    I found the material on accumulation and pension phase to be most informative and easy to understand and have subscribed you your site.

    I just had a question on my SMSF. It owns a residential investment property that I’m organising to buy from my fund. I believe the this can be done if I’m in pension phase (I meet the age criteria). I also believe that stamp duty is exempt given that I’m transferring the property into my own name. There is currently an LRBA that will be refinanced under my name. Do you see any issues with what I’m trying to achieve here and are there any traps to be aware of?

    Many thanks.

    Ari

    Reply
    • Chris Strano

      Hi Ari, forgive me for the late reply.I don’t believe there is a need to be in pension phase for you to purchase your property from your SMSF. However, being in pension phase can eliminate any potential CGT. Stamp duty exemption may be different from state to state, so double check what applies to you based on which state the property is in and where you live. It’s always best to review the SMSF trust deed to see if there is any specific rules you need to follow prior to undertaking the transaction. Also, you should find out all accounting, administration and borroign costs associated with the transfer of property and associated debt.All transactions, particularly the sale price of the property, will need to be done on an arm’s length basis.

      Reply
  2. Pat Jones

    Hi Chris
    I am in my 70’s but have kept my super in accumulation phase as I have not needed to draw upon these funds. I am unhappy with my retail fund and intend to switch to an industry fund and begin a pension. It has been suggested to me that it may be best to first switch my investments to pension phase in the current fund, draw the required amount for this year as a pension… then convert back to accumulation phase in a simple cash account before transferring to my new fund. I understand that you can only transfer funds that are in accumulation phase. This would save me money in taxes incurred in the current fund from any recent income received and when the assets are sold, . Any comments please..?

    Reply
    • Chris Strano

      Hi Pat, all realised capital gains within accumulation phase are taxed at 15% (effectively reduced to 10% if the investment sold was owned for longer than 12 months). All realised capital gaisn within pension phase are received tax free.
      Be aware, when switching from an accumulation account to a pension account, some super funds sell down the assets in accumulation phase, prior to transferring them to pension phase, which can result in CGT. Also, consider if there are any transaction costs for switching between accumulation and pension phase and back again.

      Reply
  3. Pamela Densley

    Hi I am 61and my husband 67. We have a SMSF from which we are both drawing a pension. We are reorganising our finances so that my husband qualifies for the aged pension. As part of this we have used the bring forward rule to deposit 300k into a separate accumulation acct that I hold. Am I allowed to roll my section of our SMSF from pension to accumulation as well, or does this need to be included in the 300k? Thanks Pamela

    Reply
    • Chris Strano

      Hi Pamela, a rollback from pension phase to accumulation phase does not count towards the contribution caps, as it is already in the superannuation environment. One thing to consider, however, is that the earnings from investments within pension phase are received tax free; whereas there is tax on earnings within accumulation phase. Therefore, you might want to calculate the benefit in Age Pension payments by employing such a strategy vs the estimated additional earnings tax within super that will become payable.
      Related Posts
      Rollback Pension to Accumulation
      SMSF Pension Phase
      Pooled vs Segregated Assets in an SMSF

      Reply

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