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.

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.

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 of 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).

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.

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.

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.

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Chris Strano

Chris Strano is a specialist independent superannuation author for SuperGuy.com.au - one of Australia's leading superannuation information resources.

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