An account-based pension can turn your super into regular retirement income. Here is how minimum drawdowns, tax treatment, the transfer balance cap and key risks work.
You’ve spent decades building your super. Then you stop working, and the question quietly changes. It’s no longer “how do I grow this?” but “how do I turn it into an income that lasts?”
That shift catches a lot of people off guard. Most Australians have a clear picture of super in the accumulation phase, with contributions going in and a balance ticking up. Far fewer have thought about the other side, where the money starts coming out and needs to keep coming out, possibly for thirty years or more.
For many retirees, an account-based pension is one way to turn super into an income stream. To walk through how it fits together, we spoke with Alana Pincombe, a Senior Financial Advisor at Viridian Advisory in Melbourne, who has spent more than 15 years helping clients and their families set up and manage their retirement income.
What is an account-based pension?
An account-based pension is a retirement income stream you start with super after reaching preservation age and meeting a condition of release. You transfer some or all of your super from accumulation into retirement phase, then choose how often you are paid and, subject to the annual minimum, how much you withdraw.
The balance generally stays invested rather than being held entirely in cash. Its value rises or falls with investment returns and is reduced by withdrawals and fees. Those moving parts all affect how long the account may last.
You may also see it called an allocated pension or retirement income account. These are commonly used names for the same type of product.
“For many clients, the biggest shift is realising their super isn’t something to keep building anymore,” Alana says. “It’s there to support their lifestyle, so we focus on creating an income they feel comfortable and confident relying on.”
One thing she sees often catch people out is overestimating how much income they’ll actually need each month. “We help clients work out what they need to live comfortably, with an ongoing income for everyday costs and the flexibility to make additional withdrawals when something bigger comes up,” Alana explains.
Account-based pension minimum drawdown rates
Once you start an account-based pension, you must withdraw a minimum amount each financial year. The percentage increases with age.
The standard minimum drawdown rates are:
For an existing pension, the percentage applies to your account balance and age at 1 July. A 67-year-old with $600,000 at 1 July therefore has a minimum payment of $30,000 for the year. If the pension starts during the year, the fund generally calculates a pro-rated minimum using the starting balance and the days remaining. If it starts on or after 1 June, no minimum is generally required for that financial year. A retirement-phase account-based pension has no maximum withdrawal, although taking more will reduce the balance available for later years.
The temporary reduction to minimum payments that applied during the COVID-19 period has ended. The standard rates above now apply.
What happens if you miss the minimum pension payment?
If the minimum is not paid by 30 June, the pension may be taken not to have met the pension standards for that financial year. This can affect the fund’s entitlement to tax-exempt earnings on the assets supporting the pension.
Limited administrative concessions may apply to certain small shortfalls caused by an honest mistake or matters outside the trustee’s control, but the conditions and correction timeframes are strict. If you identify a possible shortfall, contact your super fund or adviser promptly rather than assuming it can be fixed later.
The minimum is the least the rules require you to take. It is not a recommendation about how much you should spend. Drawing only the minimum may or may not match the lifestyle you want, the other income you receive or the balance you hope to retain.
Alana sees this often. “Often it comes down to uncertainty around how much they can comfortably draw from their super, and whether it will last throughout their lifetime,” she says.
“We model different scenarios for clients so they can see what they could comfortably spend throughout retirement, and how that affects their super over time,” Alana adds. “That’s what gives them the confidence to spend what they can actually afford.”
How is an account-based pension taxed?
The tax treatment depends on your age, the source of the benefit and whether the pension is in retirement phase.
- 60 and over. For most people receiving payments from a taxed super fund, account-based pension payments are tax-free from age 60 and are not included in assessable income. Different treatment can apply to untaxed elements, which are more common in some public sector schemes, and to certain death-benefit income streams.
- Under 60. Accessing a retirement-phase pension before age 60 is uncommon and generally requires a special condition of release, such as permanent incapacity, or may occur through an eligible death-benefit income stream. The tax-free component is not assessable, while the treatment of taxable components and any available tax offset depends on the circumstances and source of the benefit.
Investment earnings on assets supporting a retirement-phase pension are generally exempt from tax within the fund. By comparison, earnings in accumulation are generally taxed at up to 15%. The exemption applies to retirement phase, not to an ordinary transition-to-retirement pension that has not entered retirement phase. Investment returns can still be positive or negative, and fund fees continue to apply.
This tax treatment can be an important part of deciding when and how much super to move into retirement phase, alongside cash-flow needs, investment strategy and the transfer balance cap.
How the transfer balance cap works
The transfer balance cap limits the total amount of super you can transfer into retirement phase. The general cap is currently $2.1 million. Your personal transfer balance cap may be lower, depending on when you first started a retirement-phase income stream and how much of your cap you have previously used.
A few things worth knowing about how it works:
- The cap is generally tested against amounts transferred into retirement phase, rather than the account’s day-to-day market value. Investment growth after the pension starts does not, by itself, use more of your cap.
- The general cap of $2.1 million isn’t necessarily your cap. Your personal cap is set the first time you start a retirement-phase pension, at whatever the general cap was then. If you’ve never fully used it, later increases to the general cap apply to you only in proportion to how much headroom you had left, not as a fresh jump to $2.1 million. If you’ve already used your full cap, further indexation doesn’t apply to you at all.
- If you have more super than your personal cap allows you to transfer, the remaining amount can generally stay in accumulation, where earnings are taxed at up to 15%, or be withdrawn if you are eligible. If you exceed your cap, additional tax consequences and an ATO process to remove the excess may apply.
For many people, the cap will not affect day-to-day pension payments. It becomes more important when starting or restructuring pensions, particularly if you have previously used part of your personal cap. That is a point where personal advice can help, rather than relying on general information alone.
Account-based pension vs transition-to-retirement pension
A transition-to-retirement pension, or TTR pension, lets you draw an income from super once you reach preservation age, even if you are still working and have not met a full condition of release. It has different withdrawal and tax rules from a retirement-phase account-based pension.
Here’s how the two compare:
TTR pensions are designed for a specific stage: accessing some super while you are still working. They come with their own eligibility, withdrawal and tax considerations. We will cover those in more detail in a separate article. If you are weighing one up, it is worth getting advice on how the rules apply to you.
How your money is invested in pension phase
Moving to pension phase does not automatically change how your money is invested. Subject to the options your fund offers, you can hold a mix of growth assets such as shares and defensive assets such as cash and fixed interest. The mix needs to reflect your timeframe, income needs and tolerance for market movements.
One risk in retirement is sequencing risk. In simple terms, a market downturn early in retirement can be more damaging than a similar downturn later because withdrawals are being made while the balance is falling. Selling investments after a fall can crystallise losses and leave less capital to participate in a recovery.
One approach some retirees consider is a bucket strategy: holding part of the portfolio in cash or other defensive assets to fund near-term withdrawals. This may reduce the need to sell growth assets after a market fall, but it also has trade-offs. Holding more cash can reduce long-term return potential and may not keep pace with inflation, so the right structure depends on individual circumstances.
When markets fall, Alana talks clients through the structure they already have in place. “I remind them why their portfolio was built the way it was,” she says. “It was designed with both the good periods and the harder ones in mind, so their income can keep flowing and their money has the best chance of lasting.”
The retirees who stay steadiest through a downturn, she notes, aren’t necessarily the ones with the biggest balances. “It’s not always about the numbers. A lot of it comes down to how the income is structured,” Alana says. “The ones who stay calm are the ones who planned for this before it happened. They know where their income is coming from in different market conditions, and that gives them the confidence to stay focused on the long term instead of reacting to short-term movements.”
What are the risks of an account-based pension?
An account-based pension does not guarantee income for life. How long it lasts depends on the opening balance, withdrawals, investment returns and fees. Market movements can change the value of the account, and inflation can reduce what the income buys over time.
You also generally cannot add new contributions directly to an account-based pension once it has started. New contributions usually remain in accumulation, and starting or restructuring a pension can involve additional rules, costs and tax considerations.
A few other things worth knowing
It can work alongside the Age Pension. An account-based pension does not automatically rule out the Age Pension. Services Australia assesses it under the income and assets tests, and the result depends on your age, assets, income, relationship status and other circumstances.
Think about what happens to it. Depending on the fund’s rules and the beneficiary’s eligibility, the remaining balance may be paid to an eligible beneficiary or your estate as a lump sum or, in some cases, an income stream. A valid reversionary nomination can allow the pension to continue automatically to an eligible beneficiary. Tax depends on the recipient, the components of the benefit and how it is paid; adult children who are not death-benefit dependants for tax purposes may pay tax on the taxable component.
Is an account-based pension right for you?
An account-based pension can provide a flexible way to draw retirement income from super, with concessional tax treatment in retirement phase. It does not guarantee income for life, and whether it is appropriate depends on your broader financial position, spending needs and other sources of income.
The ongoing decisions matter as much as opening the account: how much to draw, how to invest, how to manage market falls and inflation, what fees you pay, and how the pension interacts with the Age Pension and your estate plan. Those decisions are worth reviewing as your circumstances change.
If you would like to understand how an account-based pension could fit with your wider retirement plan, Alana can help you consider the options in light of your circumstances.
About Alana
Alana Pincombe believes good advice is about more than a number on a statement. It’s about understanding each client’s situation and giving them the confidence to enjoy the life they’ve worked for. A Senior Financial Advisor in Melbourne with over 15 years’ experience, she takes a holistic approach across retirement, super, investments and insurance, and works alongside accountants and lawyers so the whole picture fits together. An Accredited Aged Care Professional, Alana also volunteers with the Cancer Council pro bono program, supporting people through some of life’s harder financial moments.
Frequently asked questions
- How much do I have to withdraw from my account-based pension each year?
It depends on your age. The current minimum ranges from 4% if you are under 65 to 14% if you are 95 or older. For an existing pension, the percentage applies to your age and balance at 1 July. A pension started during the year generally has a pro-rated minimum, although no minimum is generally required if it starts on or after 1 June. There is no maximum withdrawal for a retirement-phase account-based pension, but larger withdrawals reduce the remaining balance. - Do I pay tax on my account-based pension?
For most people aged 60 or over who receive payments from a taxed super fund, the payments are tax-free. Investment earnings on assets supporting a retirement-phase pension are generally tax-exempt within the fund. Different rules can apply if you are under 60, receive an untaxed element or receive certain death-benefit income streams. - What’s the transfer balance cap?
It limits the total amount of super you can transfer into retirement phase. The general cap is currently $2.1 million. Investment growth after a pension starts does not, by itself, use more of the cap. Your personal cap may be lower depending on when you first started a retirement-phase income stream and how much of your cap you have used. - Can I still get the Age Pension if I have an account-based pension?
Possibly. Services Australia assesses an account-based pension under the Age Pension income and assets tests. Whether you qualify for a full or part payment depends on your age, assets, income, relationship status and other circumstances. - What happens to my account-based pension when I die?
Depending on the fund’s rules and the beneficiary’s eligibility, the remaining balance may be paid to an eligible beneficiary or your estate as a lump sum or, in some cases, an income stream. A valid reversionary nomination can allow the pension to continue automatically. The tax treatment depends on the beneficiary, the benefit’s components and how it is paid. - Can an account-based pension run out?
Yes. An account-based pension is not guaranteed to last for life. How long it lasts depends on the starting balance, how much you withdraw, investment performance and fees.
