Account Based Pensions Explained
Posted on:
Raffi Pailagian
MBA, BSc, DipFP
Financial Planner / Managing Partner
How To Turn Your Super Into Retirement Income
An account-based pension is a retirement income stream funded from your superannuation. Once eligible, you can transfer super into a pension account, draw regular income and make lump-sum withdrawals while the remaining balance stays invested, subject to minimum annual withdrawal requirements and applicable superannuation and tax rules.
Quick Summary
An account-based pension converts accumulated super into flexible retirement income while keeping the remaining balance invested. It can be highly tax-effective, particularly after age 60, but it does not guarantee income for life. How long your money lasts depends on withdrawals, investment returns, inflation, fees and longevity.
Table Of Contents
- What Is An Account-Based Pension?
- How Does An Account-Based Pension Work?
- When Can You Start An Account-Based Pension?
- How Much Can You Transfer Into An Account-Based Pension?
- How Much Do You Have To Withdraw Each Year?
- How Are Account-Based Pensions Taxed?
- Account-Based Pension vs Accumulation Account
- How Should An Account-Based Pension Be Invested?
- How Do You Make An Account-Based Pension Last?
- Sequencing Risk Matters Particularly Around Retirement
- Account-Based Pension vs Lump-Sum Withdrawals
- How Do Account-Based Pensions Affect The Age Pension?
- What Happens To An Account-Based Pension When You Die?
- Common Account-Based Pension Mistakes
- How Financial Planners Build Retirement Income Around An Account-Based Pension
- Final Thoughts
- Frequently Asked Questions (FAQ)
What Is An Account-Based Pension?
An account-based pension is one of the main ways Australians turn accumulated superannuation into retirement income.
Rather than withdrawing your entire super balance when you retire, you transfer some or all of your eligible super into a pension account and draw income from it over time.
The money that is not withdrawn remains invested. Depending on your fund, this may include Australian and international shares, fixed interest, property investments, cash and diversified investment options.
That distinction matters. Starting a pension does not mean your super stops being an investment portfolio. Its value can continue to rise when investment returns exceed withdrawals and fees, or fall when withdrawals and investment losses exceed returns.
An account-based pension is also fundamentally different from the government Age Pension. An account-based pension is funded using your own superannuation savings. The Age Pension is a government social security payment administered by Services Australia and subject to eligibility, income and assets tests.
Moneysmart explains that account-based pensions allow retirees to receive regular income while the remainder of their super stays invested.
An account-based pension is therefore best thought of as a structure for managing retirement capital and income, rather than an investment in itself.
How Does An Account-Based Pension Work?
Starting an account-based pension generally involves satisfying a condition of release, deciding how much super to transfer into retirement phase, choosing investments and establishing regular pension payments.
In practice, the process usually involves seven steps:
- Satisfy an eligible condition of release.
- Decide how much super to move into retirement phase.
- Establish the account-based pension with your super fund.
- Select an appropriate investment strategy.
- Nominate the amount and frequency of pension payments.
- Meet the statutory minimum pension payment each financial year.
- Review income, investments and cashflow throughout retirement.
You do not necessarily need to move your entire super balance into pension phase.
For example, a retiree with $1.2 million might transfer $1 million into an account-based pension and deliberately leave $200,000 in accumulation. Whether that is appropriate depends on contribution plans, tax, investment strategy, liquidity and other circumstances.
Once the pension begins, withdrawals can generally be structured monthly, quarterly, half-yearly or annually depending on the provider. Retirees may also make additional lump-sum withdrawals when required.
This creates considerable flexibility—but that flexibility needs to be managed carefully.
Drawing $90,000 from a pension because you are legally permitted to do so does not mean $90,000 is sustainable.
When Can You Start An Account-Based Pension?
A standard retirement-phase account-based pension generally requires you to have satisfied a condition of release that gives you unrestricted access to the relevant super benefits. Common conditions include retiring after reaching preservation age, ceasing an employment arrangement on or after age 60, or reaching age 65.
For Australians currently approaching retirement, preservation age is 60.
The ATO lists common conditions of release including reaching preservation age and retiring, ceasing an employment arrangement on or after age 60, and reaching 65 even if you have not retired.
Someone who has reached preservation age but has not met a full condition of release may instead be eligible for a transition-to-retirement income stream (TRIS).
A TRIS has different rules and restrictions from an ordinary retirement-phase account-based pension. It is commonly used by people who continue working while progressively moving towards retirement.
For more detail, you might want to check out our guide to transition-to-retirement strategies:
How Much Can You Transfer Into An Account-Based Pension?
You can transfer retirement savings into retirement phase up to your available personal transfer balance cap. For 2026–27, the general transfer balance cap is $2.1 million, following indexation from $2 million on 1 July 2026 (ATO).
The $2.1 million figure should not automatically be treated as everyone’s personal cap.
If you previously commenced a retirement-phase pension, your personal transfer balance cap may differ because of the proportional indexation rules. Your transfer balance account records relevant credits and debits associated with retirement-phase income streams (ATO).
It is also important to distinguish the transfer balance cap from your total super balance.
Having more than $2.1 million in super does not generally mean you have to withdraw everything above $2.1 million from super. Subject to the rules applying to your circumstances, amounts that cannot be transferred into retirement phase can generally remain in an accumulation account, where investment earnings continue to be taxed under the normal superannuation rules.
Illustrative Scenario: Super Above The Transfer Balance Cap
Consider a 65-year-old professional retiring with $2.6 million in super and no previous transfer balance cap usage.
Assuming the full $2.1 million general cap is available, they could transfer up to $2.1 million into retirement phase. The remaining $500,000 might remain in accumulation or potentially be withdrawn from super, depending on their objectives.
These figures are illustrative only.
For couples, the planning becomes more interesting because transfer balance caps apply individually. One spouse may have considerably more unused pension capacity than the other.
How Much Do You Have To Withdraw Each Year?
Account-based pensions must generally pay at least a prescribed percentage of the pension balance each financial year and the percentage increases with age.
For 2026–27, the standard minimum rates are:
| Age | Minimum Annual Withdrawal Rate |
| Under 65 | 4% |
| 65–74 | 5% |
| 75–79 | 6% |
| 80–84 | 7% |
| 85–89 | 9% |
| 90–94 | 11% |
| 95 or older | 14% |
The minimum is generally calculated using the pension account balance at the beginning of the financial year. When a pension starts part-way through a year, the minimum is generally proportionately reduced according to the remaining days in that financial year (ATO).
There is generally no maximum withdrawal from a normal account-based pension once you have unrestricted access to the benefits. Different restrictions apply to transition-to-retirement income streams.
Illustrative Scenario: How Much Should A Retiree Draw?
Suppose a 67-year-old has an account-based pension worth $900,000 at the start of the financial year.
The statutory 5% minimum would require annual pension payments of at least $45,000.
But imagine their household actually requires $65,000 from this pension after allowing for their partner’s income and other investments.
Drawing $65,000 may be perfectly legitimate. The more important financial-planning question is whether that withdrawal can be sustained over a potentially 25–30-year retirement.
The statutory minimum is a compliance requirement—not a recommendation about how much you should spend.
Ready To Discuss Your Requirements?
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How Are Account-Based Pensions Taxed?
For many Australians aged 60 or over receiving an account-based pension from a taxed superannuation fund, pension payments are generally tax free.
In addition, investment earnings on assets supporting a qualifying retirement-phase pension can generally receive tax-exempt treatment within the fund (ATO).
The tax exemption on retirement-phase investment earnings is generally described as exempt current pension income (ECPI).
This combination can make retirement-phase super one of Australia’s most tax-effective investment structures.
However, statements such as “super is completely tax free after 60” can be misleading.
Tax treatment can depend on your age, whether the fund is taxed or untaxed, the components of your benefit, the type of pension and other circumstances. The transfer balance cap also limits the amount that can benefit from retirement-phase treatment.
People receiving super income streams before age 60 can also face different tax treatment.
The practical objective should therefore be to structure after-tax retirement income efficiently, rather than simply assuming every super strategy after 60 produces the same tax outcome.
Account-Based Pension vs Accumulation Account
Accumulation and pension accounts can hold similar investments, but they serve different purposes and have different tax and withdrawal rules.
| Feature | Accumulation Account | Account-Based Pension |
| Primary purpose | Accumulating retirement savings | Funding retirement income |
| Access | Restricted until condition of release | Generally flexible once unrestricted |
| Investment earnings | Generally taxed at up to 15%, subject to super tax rules | Earnings supporting retirement-phase pension generally tax exempt |
| Minimum withdrawal | None | Annual minimum applies |
| Contributions | Can generally receive eligible contributions | Contributions generally cannot be paid directly into an existing pension account |
| Transfer balance cap | Does not limit accumulation balance itself | Limits amount transferred into retirement phase |
| Investment options | Fund dependent | Fund dependent |
| Typical use | Building/retaining super | Producing retirement income |
A retiree expecting to make further super contributions, for example, may retain an accumulation account while drawing retirement income from a separate pension account.
That can create administrative complexity, but it can also provide useful strategic flexibility.
How Should An Account-Based Pension Be Invested?
Retirement does not automatically mean your super should become conservative. An account-based pension may need to fund spending for 25–35 years, making long-term growth and inflation protection important alongside short-term income security.
A well-designed retirement portfolio commonly combines growth assets such as shares and property-related investments with defensive assets such as fixed interest and cash.
The appropriate mix depends on spending requirements, other assets, Age Pension eligibility, risk tolerance and how much flexibility exists if markets fall.
The central problem is balancing two competing risks.
Too much investment risk can expose a retiree to severe losses at exactly the wrong time. Too little can leave the portfolio unable to keep pace with inflation over several decades.
This is why moving an entire pension into cash on retirement can be just as questionable as maintaining an aggressively growth-oriented portfolio without sufficient liquidity.
For a deeper discussion of portfolio construction, see:
How Do You Make An Account-Based Pension Last?
No account-based pension can guarantee that your money will last for life. Sustainability depends on the interaction between withdrawals, investment returns, inflation, longevity, fees, taxation and the sequence in which investment returns occur.
Consider the major risks:
| Risk | Why It Matters | Practical Planning Response |
| Sequencing risk | Early market falls combined with withdrawals can permanently reduce capital | Maintain liquidity, diversify and allow spending flexibility |
| Inflation | Reduces purchasing power over time | Maintain appropriate long-term growth exposure |
| Longevity | Retirement may last 30 years or more | Model beyond average life expectancy |
| Excessive withdrawals | Capital may decline too quickly | Regularly test spending against long-term projections |
| Investment risk | Major losses can reduce future income | Diversify and align risk with capacity for loss |
Sequencing Risk Matters Particularly Around Retirement
A major market fall in the first few years after retirement can be disproportionately damaging because pension payments continue while investment values are depressed.
The retiree may effectively be forced to sell more investment units to generate the same income, leaving fewer assets participating in a subsequent market recovery.
This is known as sequencing risk, which we examine in an earlier article, What Is Sequencing Risk?
Practical responses can include holding appropriate cash and defensive reserves, maintaining a diversified portfolio, rebalancing investments and allowing some discretionary spending to vary when markets perform poorly.
Illustrative Scenario: A Couple Retiring At 65
Consider a couple retiring at 65 with combined super of $1.5 million and other savings of $100,000.
They initially estimate annual household spending of $90,000.
Rather than simply dividing $1.5 million by $90,000 and concluding they have roughly 16 years of retirement funding, proper modelling would consider investment returns, inflation, pension withdrawals, potential Age Pension entitlement later in life and changes to expenditure.
They may also distinguish between $65,000 of relatively essential expenditure and $25,000 of discretionary travel and entertainment.
That distinction creates flexibility during poor investment markets.
Account-Based Pension vs Lump-Sum Withdrawals
Regular pension payments and lump-sum withdrawals are not necessarily competing strategies and many retirees use both.
A pension can provide predictable fortnightly or monthly cashflow for ordinary expenditure, while lump sums can fund irregular expenses such as replacing a car, renovating a home or assisting family.
Moneysmart notes that retirees using regular account-based pension income can still take lump sums for major expenses.
Regular income can also make household budgeting easier. If $6,000 arrives in a bank account each month, retirement can feel more like receiving a salary.
Lump sums provide greater flexibility but can make spending discipline more important.
A $100,000 withdrawal also has a different long-term investment consequence from a $10,000 withdrawal. Once capital leaves the pension, it no longer participates in future investment returns within that account.
How Do Account-Based Pensions Affect The Age Pension?
Account-based pensions can affect Age Pension eligibility because Services Australia generally considers their account balance under the assets test and for most modern account-based pensions, treats the balance as a financial investment for income-test purposes using deeming rules.
Services Australia explains that for account-based income streams purchased on or after 1 January 2015, deeming generally applies. The actual amount you choose to withdraw is therefore not normally the amount used to calculate income under the income test.
For the assets test, account-based income streams with an account balance are generally assessed using that balance (Services Australia).
This means simply transferring super from accumulation into an account-based pension does not automatically improve Age Pension entitlement.
The treatment of super can change when someone reaches Age Pension age, so household planning should consider both members of a couple rather than looking at each pension in isolation.
Illustrative Scenario: Combining Super And The Age Pension
A couple may begin retirement entirely self-funded but later qualify for a part Age Pension as their assessable assets reduce.
In that situation, their retirement income may eventually come from a combination of two account-based pensions, personal investments and the Age Pension.
The objective is not necessarily to maximise Centrelink payments. It is to maximise sustainable household retirement income while operating within the rules.
What Happens To An Account-Based Pension When You Die?
Superannuation does not automatically become part of your estate when you die.
How the remaining pension balance is dealt with depends on the fund rules, beneficiary arrangements and superannuation law.
Fund members may be able to make binding or non-binding death-benefit nominations. Depending on the circumstances, eligible dependants may receive a super death benefit as a lump sum or an income stream, while payments to non-dependants generally need to leave the super system as a lump sum (ATO).
A reversionary pension is structured so that the pension automatically continues to an eligible nominated dependant, commonly a spouse, following the member’s death.
Estate planning should therefore be considered when the pension is established—not years later as an unrelated exercise.
Beneficiary nominations, wills, powers of attorney, tax consequences and each spouse’s transfer balance position can interact in ways that are easy to overlook.
Common Account-Based Pension Mistakes
The biggest pension mistakes are often not technical breaches. They are strategic decisions that appear reasonable in isolation but weaken the retirement plan over time.
Common examples include:
- assuming an account-based pension provides guaranteed lifetime income;
- treating the statutory minimum as a recommended spending rate;
- withdrawing too much during the early years of retirement;
- moving excessively into cash immediately after retirement;
- remaining too aggressively invested without sufficient liquidity;
- ignoring inflation over a 25–35-year timeframe;
- failing to prepare for sequencing risk;
- transferring everything into pension phase without considering future contribution strategies;
- focusing on tax while ignoring Centrelink or estate-planning consequences; and
- establishing the pension and then leaving it unchanged for many years.
A pension strategy that was appropriate at 65 may not remain appropriate at 75 or 85.
Retirement spending changes. Investment markets change. Legislation changes. Family circumstances change.
The strategy needs to evolve with them.
How Financial Planners Build Retirement Income Around An Account-Based Pension
An experienced financial planner generally treats an account-based pension as one component of the retirement strategy rather than the strategy itself.
Planning usually begins with expenditure.
How much will the household actually need? How much is essential? How much is discretionary? Are substantial expenses expected for travel, renovations, vehicles, family assistance or later-life care?
The adviser can then assess super balances, investments outside super, debts, tax, potential Age Pension entitlement, investment risk and estate-planning objectives.
Retirement modelling can test what happens if markets perform poorly early, inflation remains elevated, one spouse lives considerably longer than expected or expenditure exceeds the original assumptions.
Consider a couple with $1.8 million in combined super, $300,000 of investments outside super and annual retirement expenditure of $100,000.
Simply establishing two pensions and withdrawing $100,000 each year misses most of the important decisions.
A stronger strategy asks:
How should their super be divided between accumulation and pension accounts? How much cash should be retained? Which assets should fund the first several years of spending? How much growth exposure is appropriate? What happens after a 20% market decline? Could they reduce discretionary spending temporarily? When might they qualify for the Age Pension? What happens to the surviving spouse when one dies?
Those questions are retirement income planning.
The pension is simply one of the structures used to implement the answers.
For a broader discussion, see:
Final Thoughts
An account-based pension can be one of the most flexible and tax-effective ways for Australians to turn accumulated super into retirement income. It can provide regular cashflow, retain investment flexibility and, for many retirees, provide substantial tax advantages.
But starting the pension is only the beginning.
The long-term outcome depends on how much you withdraw, how the portfolio is invested, what happens during market downturns, how inflation affects expenditure, how long you live and how the pension interacts with other investments, tax, the Age Pension and estate planning.
The most important question is therefore rarely “Should I start an account-based pension?”
It is: “How should this pension fit into a retirement income strategy that can adapt over the next 25–35 years?”
That is where retirement planning moves beyond pension rules and becomes a long-term cashflow, investment and risk-management exercise.
Frequently Asked Questions (FAQ)
For most people aged 60 or over receiving an account-based pension from a taxed super fund, pension payments are generally tax free. Investment earnings on assets supporting a qualifying retirement-phase pension may also be exempt from tax within the fund, subject to the transfer balance cap and other rules.
There is no universal government minimum balance for commencing an ordinary account-based pension, although individual super funds may impose product minimums. Whether starting a pension is worthwhile depends on your balance, income requirements, other assets and retirement strategy.
Yes. Once you have unrestricted access to the underlying super benefits, a standard account-based pension generally allows withdrawals above the statutory minimum, including lump sums. The more important question is whether higher withdrawals are sustainable.
An account-based pension normally stops when its balance is exhausted. It does not generally guarantee income for life, which is why withdrawal rates, investment strategy, longevity and potential Age Pension eligibility need to be considered together.
Yes. You do not necessarily need to transfer all your super into an account-based pension. Maintaining both pension and accumulation accounts can sometimes be useful for tax, contribution or strategic reasons.
A standard account-based pension generally follows a full condition of release and provides unrestricted access to the underlying benefits. A transition-to-retirement income stream can allow someone who has reached preservation age to access limited super income while continuing to work, subject to additional restrictions.
Not necessarily. Once relevant Centrelink rules apply, account-based pensions are generally assessable under the Age Pension means tests. Simply changing the super account from accumulation to pension phase does not automatically increase entitlement.
References:
ASIC Moneysmart – Account-based pensions
ATO – Illegal early access to super
ATO – Transfer balance cap
ATO – Transfer balance account
ATO – Payments from super
ATO – Tax on super benefits
ATO – Exempt current pension income
Services Australia – Income streams
Services Australia – Media column – Hank Jongen’s April column – Deeming Explained
Services Australia – Financial investments
ATO – Superannuation death benefits
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