What are the features of an account based pension?
The main characteristics of an account-based pension are:
- No fixed term – the pension finishes when your account balance is exhausted.
- Minimum annual pension payment – you must take at least a certain amount out of your pension each year. It’s worked out by multiplying the percentage below that applies to your age by your pension account balance at 1 July that year.
| Age you reached on your last birthday |
Percentage of account balance |
| Under 65 |
4% |
| 65-74 |
5% |
| 75-79 |
6% |
| 80-84 |
7% |
| 85-89 |
9% |
| 90-94 |
11% |
| 95+ |
14% |
- Adjustments are made if you start the pension during the year. For example, if you start a pension in January, only around half of the full year’s payment has to be made and the calculation will be done based on your balance in January (ie when you start the pension), not the previous 1 July. In fact, if your pension starts as late as June, you do not need to make a payment in that first financial year at all.
- You can stop (known as 'commuting') your pension at any time and return your benefit to a super accumulation account. You might do this if you no longer want to take so much income, for example, if you return to work. If you decide to do this, you have to pay your pension up-to-date first, for example, if you’re stopping your pension on 1 October, you would have to take roughly one quarter of the year’s minimum payments first.
- The fact that you’ve started taking a pension doesn’t prevent you from also having lump sums paid from your account (sometimes there are tax benefits to doing this or you may want to draw out a particular asset in specie). If your pension is a TRP, there are some extra restrictions about lump sums.
- There are also restrictions around lump sums that are designed to make sure you still meet the minimum pension requirements. These are particularly relevant if you’re taking a very large payment as a lump sum and/or stopping the pension entirely.
- Starting a pension doesn’t prevent you from continuing to make contributions to the fund – these are just recorded separately in a new member account. You can’t simply add them to the pension once it is running.
- You can set your pension to continue to someone else (such as a spouse) when you die. This is known as a ‘reversionary’ pension. Note that you can generally only nominate your children to be your reversionary pensioner if they are minors, and even then, they have to cash out the pension when they reach age 25.