Account-Based Pensions Explained in 10 Minutes

Many Australians spend decades building their superannuation, but when retirement comes, one of the biggest questions is ‘How do you actually turn that super into a source of retirement income?’

One of the most widely used retirement income options in Australia is the account-based pension.

Account-based pensions are still managed within superannuation funds or self-managed super funds (SMSFs), and are seen to be a very flexible approach to cover your retirement costs and with generous tax treatment from the Government.

In this article, I’ll explain how they work, the benefits and what you need to understand before starting an account based pension. 

What Is an Account-Based Pension?

In the superannuation industry, we tend to overcomplicate terminology, so if you hear other names like allocated pension, superannuation pension or retirement income streams, they all typically refer to the same thing; account based pensions.

But importantly, don’t confuse account based pension with ‘transition to retirement pension’ or ‘lifetime annuities’; these are different forms of retirement incomes altogether. You can check our other articles in relation to transition to retirement accounts and lifetime annuities. 

For most Australian’s in their working years, their superannuation is held in what’s called the ‘Accumulation’ phase, where the balance has grown over the many years from money contributed and positive investment returns.

At retirement, or meeting a condition of release, a superannuation member can convert all or part of their balance into an account-based pension. The balance is transferred and remains invested, and if you need you can even continue to hold some money in the Accumulation phase.

I won’t go into too much detail here about the rules to release super, but retirement for superannuation purposes would typically be from age 60, at the earliest. 

What access do I have?

In terms of the regular withdrawals, the retiree must nominate what pension income to pay themselves and what frequency; being fortnightly, monthly, quarterly, half-yearly or yearly.

The minimum pension income that you must pay yourself depends on your age and starting balance, which resets at the start of every new financial year. The minimum you need to draw is shown in this table.

For example, a 67 year old with $500,000 invested would need to draw 5% of their account balance each year, or $25,000 over the course or the year.  

Just think of an account based pension, as drawing a tax-free wage in retirement using your own savings.

However, the more that you draw as pension income over and above the minimum, the sooner the account balance will be exhausted. There is certainly no guarantee when it comes to the account balance lasting for life. 

Aside from the regular pension income, you also retain the option to make lump sum withdrawals as required, and for whatever purpose.

So, one of the key features of account based pension is the flexibility to suit your purposes. You can change your regular pension income, make one-off lump sum withdrawals and if you don’t want to keep open, you can transfer the money back to where it came from, the accumulation phase. 

Tax issues

A big drawcard to owning an account based pension, is the simplicity in knowing there is no tax payable.

Firstly, any money drawn out of the account based pension as regular income or lump sum payments to your bank account, is tax free for people aged 60 and above.

Secondly, there is no tax to the investment earnings or capital gains in the account based pension.

Compare this tax free environment to the accumulation phase, where earnings are taxed at up to 15% and to your personal name, where earnings are taxed at your marginal rate.

Essentially, the account based pension gives you a more powerful earnings capacity, and better relative performance compared to money held in accumulation.

For some public sector superannuation funds, there may be tax payable despite being over 60, so check with your super fund if this applies to you. 

Investment Choice

Even though you’re retired, your super is still invested, and if you plan to be around for another 20-30 years, then the money still needs to be structured for long term growth and aligned with your risk profile.

As a retiree, you are faced with a range of risks to be managed carefully.

Sequencing risk is the risk of facing poor market returns in the early years of retirement damaging your savings over the longer term. As you enter retirement, your superannuation savings are typically at their peak balance and the dynamics of your savings shift. No longer are your adding money and buying into the investment market while employed, but in retirement where you are selling parcels of investments to cover the pension income.

While you are withdrawing money to cover your retirement lifestyle costs, you are likely more sensitive to market volatility.

For example, two retirees may experience the exact same average investment returns over say ten years. However, the person who experiences the negative returns early in retirement can end up with significantly less money remaining because they are drawing income while their investments are falling.

And throughout retirement, with account based pension you will have to manage longevity risk, which is essentially your savings not lasting as long as expected. As mentioned before there is no guarantees, so how long your savings last will depend on when you want to retire and how costly your retirement lifestyle, which is different for everyone.

There are of course other categories of risks to consider, so it’s important to get the right investment mix and take an active approach to how your money is invested to work for your needs. Check out this video for more information on choosing the right investment approach for your super. 

How much to transfer

There is a limit to consider on how much super you can transfer into the tax-free pension phase.

This is known as the transfer balance cap, currently $2 million and indexed to $2.1 million from July 2026.

There may be consideration to leave a balance in the accumulation phase to accept any further contributions, but most super funds ask that you have at least $20,000 to start an account based pension. 

Centrelink assessment

It is important to understand how an account based pension might affect your eligibility (or your partner’s) for government benefits, including the Age Pension, Disability Support Pension and JobSeeker. 

For people under the age of 67, superannuation in the “accumulation” phase is not assessed at all by Centrelink. However, an account based pension is captured as a financial asset for Centrelink’s Asset’s and Income Test regardless of your age.

For people 67 and older, moving superannuation from the accumulation to the account based pension environment will make no difference from a Centrelink perspective, both assessable.

Some older account based pensions commenced prior to January 2015 may be assessed differently to current rules.

So careful planning should be undertaken when it comes to managing your superannuation assets and claiming your optimal government benefits. 

What about the estate?

While the ideal purpose of an account based pension is to provide a source of income and to cover retirement costs, any residual account balance at your death needs to be passed to your intended beneficiaries.

Whether your superannuation is held in the accumulation phase or retirement phase, your super fund will allow you to choose your beneficiary nominations, normally as lump sum payments.

However, for account based pension, you also have the option to make a reversionary nomination, essentially allowing the account to continue after transferring to a spouse or child under the age of 18. 

Summary

Account based pensions form a core part of Australia’s retirement income framework because they allow you to:

• Convert your super into retirement income
• Keep your money invested
• Benefit from tax-free income and earnings 

Their combination of flexibility, control, and favourable tax treatment makes them the most common vehicle for Australian retirees.

However, there is no one size fits all and its worth considering the alternative retirement options as well the impact to your overall finances. Some people prefer to continue holding money in accumulation or they may be better suited to holding some of their savings in lifetime annuities, and for some it may be a combination of the different options.

If  are at the pointy end of your working life, you should of course seek advice from a qualified financial planner for strategies relating to using your superannuation in retirement and to see how an account based pension may or may not work for you.

Shaun Jones MAppFin (FP) 
Financial Planner at About Retirement