Account Based Pension Explained (Australia)

An account based pension is a retirement income stream that lets you draw regular payments from your super once you have met a condition of release.

You move money from accumulation phase into a retirement phase account. The balance stays invested. You must withdraw at least a minimum amount each year. The income is flexible, but not guaranteed for life.

Key takeaways

• Starts by transferring super into a retirement phase income stream
• Requires a condition of release such as retirement after preservation age or turning 65
• From age 60, payments from taxed funds are generally tax free
• Investment earnings in retirement phase are generally tax free
• The general transfer balance cap is $2.1 million from 1 July 2026
• Minimum annual withdrawals apply
• No new contributions can be added once started

If you prefer a short overview first, I summarise the basics here:

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How an account based pension works

Mechanically, it is straightforward.

1. You transfer a lump sum from super accumulation into a pension account.
2. You choose how often you want payments. At least once per financial year.
3. You choose the annual withdrawal amount, provided it meets the minimum.
4. The remaining balance stays invested.

Your account balance:

• Rises and falls with market performance
• Reduces as you withdraw income
• Stops when the balance reaches zero or you fully commute it

If the minimum payment is not made in a financial year, the pension can be treated as having stopped for income tax purposes at the start of that year. Earnings may then cease to qualify as exempt current pension income.

There are limited ATO exceptions for certain small underpayments, but it is better to make sure the required minimum is paid on time.

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When can you start one?

You must meet a condition of release.

Common examples include:

• Reaching preservation age and retiring
• Turning 65, even if still working
• Permanent incapacity
• Terminal medical condition

Preservation age depends on your date of birth. For anyone born on or after 1 July 1964, it is age 60.

If you have reached preservation age but are still working, you may instead be dealing with a transition to retirement income stream. I explain the distinction here:

TTR vs Account Based Pension

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Tax treatment

Tax operates at two levels.

Tax on pension payments

For most people with a taxed super fund:

• From age 60, pension payments are generally tax free.
• Between preservation age and 59, the taxed element of the taxable component is generally included in your assessable income, with a 15 percent tax offset.
• The tax free component is generally tax free.
• Before preservation age, different rules apply.

Untaxed elements, which are less common, are treated differently and may still be taxable after age 60.

The outcome therefore depends on:

• Your age
• The taxable and tax free components
• Whether the relevant component has already been taxed within the super system

Tax on investment earnings

When the pension is in retirement phase, investment earnings on assets supporting the pension are generally tax free inside the fund.

This tax free earnings treatment is often the structural reason people move into retirement phase.

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Transfer balance cap

There is a limit on how much you can transfer into tax free retirement phase income streams.

From 1 July 2026, the general transfer balance cap is $2.1 million.

Your personal cap may be lower if you previously started a retirement phase income stream before that date.

If you exceed your personal transfer balance cap, you must commute the excess and may need to pay excess transfer balance tax.

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Minimum withdrawal rules

Each financial year, you must withdraw at least a minimum amount from your account based pension.

For a pension that is already in place on 1 July, the minimum is calculated using your account balance at 1 July and the percentage that applies to your age.

If you start an account based pension later in the financial year, the first year's minimum is generally calculated using the balance when the pension starts and is reduced in proportion to the number of days remaining in the financial year.

If the pension starts on or after 1 June, no minimum payment is required for that first financial year.

There is no maximum withdrawal for a standard retirement phase account based pension.

Minimum rates increase as you age.

Current minimum drawdown rates (2026–27)

• Age Minimum Percentage
• Under 65 4%
• 65-74 5%
• 75-79 6%
• 80-84 7%
• 85-89 9%
• 90-94 11%
• 95 or older 14%

If the minimum amount is not paid in a financial year, the pension can be taken to have stopped for income tax purposes at the start of that year. Earnings may no longer qualify as exempt current pension income.

For worked examples and practical scenarios, see:

Account Based Pension Minimum Drawdown Rates

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Worked example

Sarah is 62 and retires with $800,000 in super.

She starts an account based pension with the full $800,000 on 1 January 2027.

The minimum rate at her age is 4 percent. A full year's minimum on $800,000 would therefore be $32,000.

But because Sarah starts the pension part-way through the 2026–27 financial year, her first minimum is reduced to reflect the 181 days remaining in the year.

Her minimum is approximately:

$32,000 × 181 ÷ 365 = $15,868.49

After rounding, her minimum pension payment for that first financial year is $15,870.

In the following financial year, assuming the pension is still running on 1 July, the minimum will be calculated using her account balance at that date.

Sarah can withdraw more than the minimum if needed. The remaining balance stays invested. If markets perform well, her balance may last longer. If markets fall and she withdraws more than the minimum, the account may reduce faster.

The income is flexible. It is not guaranteed.

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Lump sum or income stream?

When you meet a condition of release, you can usually choose:

• A lump sum
• An income stream
• A combination of both

A lump sum removes money from the super system. Once withdrawn, any income or gains the money later earns are generally dealt with under the normal personal tax rules.

An income stream keeps the money inside super, where earnings in retirement phase are generally tax free.

The choice can affect where your money sits, how it is taxed, how it is invested and how you draw on it over retirement.

I unpack the decision framework here:

Account Based Pension vs Lump Sum

For the ATO’s formal explanation of lump sums versus income streams, see:

ATO page on retirement withdrawal

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Age Pension considerations

An account based pension can affect your Age Pension entitlement under both the assets test and income test.

For most account based pensions started on or after 1 January 2015, Centrelink treats the account balance as a financial asset. For the income test, deeming generally applies to the balance rather than Centrelink simply counting the pension payment you choose to withdraw as income.

Some pensions that started before 1 January 2015 may continue to be assessed under older rules if the grandfathering conditions are met.

Assessment can therefore depend on:

• When the pension started
• Your Age Pension circumstances
• Your total assets
• Centrelink deeming rules

I explain this clearly here:

How an Account Based Pension Affects Age Pension

Short version here:

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How long will it last?

This depends on:

• Your withdrawal rate
• Investment returns
• Fees
• Market volatility

If withdrawals exceed long term returns, the account will eventually reduce to zero.

The Government’s MoneySmart calculator can help estimate how long your super may last:

Account Based Pension Drawdown Calculator

It is a useful starting point, but it does not account for your full personal circumstances.

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What happens when you die?

An account based pension does not necessarily disappear when you die.

Any remaining balance is generally paid as a super death benefit. Depending on your beneficiary, your nomination, the fund's rules and the circumstances, it may be paid as a lump sum or, for an eligible dependant, may be able to continue as an income stream.

A reversionary pension nomination can allow the pension to continue automatically to an eligible beneficiary, commonly a spouse, if the fund's rules and the nomination allow it.

Tax can also depend on who receives the benefit. This becomes particularly relevant where adult children may eventually inherit super.

I explain that issue separately here:

How Much Tax Do Adult Children Pay on Super?

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When does it make sense?

An account based pension often makes sense when:

• You have retired and need structured income
• You are over 60 and want tax free payments from a taxed super fund
• You want investment control and flexibility
• You are comfortable with your retirement income depending partly on investment performance and withdrawals

It may not suit someone who:

• Wants guaranteed lifetime income
• Does not want to manage investment and withdrawal risk
• Has Age Pension considerations that need careful structuring

Structure matters. Behaviour matters. Small withdrawal differences compound over time.

You also generally cannot add new contributions directly to an existing account based pension. New contributions usually need to go into an accumulation account first. I explain the options in Can You Add Money to an Account Based Pension?.

Recontribution strategies are also commonly used alongside account based pensions, particularly where estate planning is a priority. If you want to understand how that works, see my guide to the superannuation recontribution strategy explained.

If you want personalised advice on setting up or managing an account based pension, learn more about my retirement planning service.

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FAQs

What is an account based pension?

An account based pension is a retirement income stream that allows you to draw regular payments from your super once you have met a condition of release. Your balance remains invested and you must withdraw at least a minimum amount each year based on your age.

How is an account based pension taxed?

From age 60, payments from taxed super funds are generally tax free. Before age 60, the taxed element of the taxable component may be taxed at marginal rates with a 15 percent tax offset once you have reached preservation age. Untaxed elements can be treated differently.

What is the minimum withdrawal for an account based pension?

You must withdraw a minimum percentage of your account balance each financial year based on your age. If you start the pension part-way through a financial year, the first minimum is generally calculated on a pro-rata basis.

Can you add money to an account based pension?

No. Once an account based pension has started, you generally cannot add new contributions to it. Any new contributions must go into a separate accumulation account.

Does an account based pension last for life?

No. An account based pension continues until the account balance runs out unless you convert it to another structure. The income is not guaranteed for life.