You've spent thirty or forty years watching your super go in one direction. Now it's about to start going the other way, and the welcome pack from your fund is full of terms you half recognise.
This guide covers the one product most Australian retirees end up using: the account-based pension. What it is, the rules that govern it, and the settings that actually matter.
Key takeaways
- An account-based pension turns your super into a regular retirement income, while the balance stays invested.
- You must draw a minimum percentage each year, starting at 4% and rising with age.
- There's no maximum. Once you're retired, you can draw as much as you like, including lump sums
- Payments are generally tax-free from age 60.
- It's your own money, so it can run out. That's the key difference from the Age Pension.
- Several setup decisions can't be undone later. See "What your fund doesn't tell you" below.
What is an account-based pension?
An account-based pension is an account that pays you a regular income from your own super after you retire.
Your balance moves from the accumulation phase (where it's been growing) into the retirement phase. The money stays invested. You choose how often you're paid: fortnightly, monthly or on another schedule your fund offers. Think of it as paying yourself a salary from your own savings.
You'll sometimes see the older name for the same product: an allocated pension. If your statements say allocated pension, this article still applies to you.
Who can open one
You need to meet a condition of release. For most people, that means one of two things:
- You've retired, having reached preservation age, which is 60 for everyone born on or after 1 July 1964.
- You've turned 65, in which case you can access your super whether you're working or not.
(Source: ATO When you can withdraw your super)
If you're 60 and still working, the related option is a transition to retirement pension, which has tighter rules. We cover it in a separate guide.
The minimum drawdown rates by age
The government requires you to draw at least a set percentage of your balance each financial year. The minimum is calculated on your account balance at the start of each financial year, and it rises as you get older:
| Your age | Minimum annual drawdown |
|---|---|
| Under 65 | 4% |
| 65–74 | 5% |
| 75–79 | 6% |
| 80–84 | 7% |
| 85–89 | 9% |
| 90–94 | 11% |
| 95 and over | 14% |
(Source: ATO Payments from super)
Two things people get wrong about this table:
- The minimum is not a recommendation. It's the floor the rules impose, not the amount that suits your life. Some retirees should draw more and enjoy it. Others draw the minimum to keep the balance working longer. It's a setting, and it deserves a decision.
- There's no maximum. Once your pension is in the retirement phase, the cap that applies to transition pensions is gone. You can draw more, and you can take lump sums (Source: ATO Retirement withdrawal – lump sum or income stream).
How payments are taxed
For most people, simply: they aren't.
From age 60, payments from an account-based pension in a taxed super fund are generally tax-free, and you generally don't need to declare them in your tax return (Source: ATO Accessing your super to retire).
The investment earnings inside the account are also tax-exempt once it's in the retirement phase. That's better treatment than ordinary super, where earnings are taxed at up to 15% (Source: ATO Transition to retirement income streams).
One ceiling applies. The amount you can move into this tax-free retirement phase is limited by the transfer balance cap: $2.1 million per person from 1 July 2026 (Source: ATO Key super rates and thresholds). Anything above the cap stays in accumulation. For larger balances, structuring around this cap is a genuine planning decision.
Account-based pension vs the Age Pension
The names are confusingly similar. The products couldn't be more different.
| Account-based pension | Age Pension | |
|---|---|---|
| Whose money | Yours (your super) | The government's |
| Starts from | Retirement from 60, or age 65 | Age 67, subject to means tests (Services Australia: https://www.servicesaustralia.gov.au/who-can-get-age-pension?context=22526) |
| How much | You choose, above the minimum | Set by the means tests |
| Can it run out | Yes. It lasts as long as the balance does | No. It's payable for life if you remain eligible |
| Tax from 60 | Generally tax-free | Depends on your circumstances |
Most Australian retirees end up with a combination: their own account-based pension doing the heavy lifting, with a full or part Age Pension underneath it. And the two interact. Your account-based pension counts under the Age Pension means tests, so how you set it up can affect your entitlement. That interaction is one of the most valuable things to model before you retire, not after.
Example scenario
This is a hypothetical example to show how the mechanics play out. Ray isn't a real client, and this isn't a recommendation.
Ray is 67. He retires with $500,000 in super and moves it into an account-based pension.
- At his age, the minimum drawdown is 5%. On his starting balance, that's $25,000 for the year.
- Ray actually wants $32,000 a year to live the way he plans to. That's fine. There's no maximum, so he sets his payments at $32,000.
- His payments are tax-free, and the balance stays invested while he draws on it.
- Each 1 July, the minimum recalculates on his new balance. When he turns 75, the minimum rate steps up to 6%.
The question Ray should be asking isn't "what's the minimum?". It's "does $32,000 a year, on this balance, at this investment setting, last as long as I might?". That's a modelling question, and it's exactly what a retirement plan answers.
The settings that matter
An account-based pension has three dials, and your fund's default position on each may not suit you:
- The drawdown amount. The floor is set by law. The right number is set by your life.
- The payment frequency. Fortnightly, monthly, or timed around your actual bills.
- The investment mix. The balance stays invested, so how it's invested decides how long it lasts.
When we set these up with clients at Peak Wealth Management, the drawdown and investment settings get decided together, because they're really one decision: how long does this money need to last, and what income can it sustain?
What your fund doesn't tell you
This section is the part that rarely appears on a super fund's own website, usually because it argues against the simplest path. Each of these is worth knowing before you set your pension up, because several of them can't be undone afterwards.
1. Your adult children may be taxed on what's left
If your super passes to your spouse, it's generally tax-free. If it passes to a financially independent adult child, it usually isn't.
Adult children are not "death benefit dependants" under tax law unless they were financially dependent on you. That means the taxable component of your super (typically employer contributions, salary sacrifice and earnings) is taxed when it's paid to them: 15% plus the Medicare levy on the taxed element, and 30% plus the levy on any untaxed element (Source: ATO Superannuation death benefits).
On a large balance made up mostly of the taxable component, that is a meaningful amount leaving the family. Most people plan their entire estate without knowing it applies.
There are legitimate strategies to reduce the taxable component while you're still eligible to act, but they need to happen in advance, and they're personal to your circumstances. This is the single most common reason we see people wish they'd had a conversation five years earlier.
2. If your pension started before 2015, think very carefully before you touch it
This one is genuinely irreversible.
Account-based pensions that commenced before 1 January 2015 can be "grandfathered" for social security income testing, meaning they're excluded from the deeming rules that apply to newer pensions. For the Commonwealth Seniors Health Card, the grandfathering applies where the pension commenced before 1 January 2015, and you held the card immediately before that date and have held it continuously since.
Here's the trap: stopping the pension, rolling it to another fund, or restarting it as part of another strategy ends the grandfathering permanently. The replacement pension is a new pension, and it gets deemed.
Fund websites and switching campaigns don't mention this, because it argues against switching. If your pension pre-dates 2015, get advice before you move anything.
3. Reversionary or binding nomination: a decision your spouse will feel
Most people tick a beneficiary box without knowing the two options behave very differently.
If your pension is reversionary, it automatically continues to your spouse on your death, and the value isn't credited to their transfer balance account until 12 months after the date of death, giving them time to arrange their affairs (Source: ATO Superannuation death benefits).
If it isn't reversionary, the credit generally arises when the death benefit income stream starts, with no equivalent breathing room.
For a surviving spouse who already has their own pension, that 12-month window can be the difference between an orderly plan and being forced to move money out of the tax-free environment during the worst year of their life. It's not a box to tick casually, and it interacts with your will, so it belongs in the same conversation as your estate planning.
4. You don't have to move your whole balance
The paperwork implies all-or-nothing. It isn't.
You can move part of your super into a pension and leave the rest in accumulation. That matters because once a pension has started, you can't add to it. You can't put contributions or rollovers into an existing pension account (Source: ATO Income stream (pension) rules and payments).
If you're still receiving contributions, still working part-time, or planning a downsizer contribution, keeping an accumulation account open is often the practical choice. Otherwise the only way to combine new money with an existing pension is to stop it and start a new one, which is exactly the move that destroys pre-2015 grandfathering.
5. The date you start it changes your first year's minimum
Start a pension part-way through a financial year and the first year's minimum is pro-rated for the days remaining, rather than the full annual percentage. And if it commences on or after 1 June, no minimum payment is required at all for that financial year (Source: ATO Payments from super).
A small detail, but it means the difference between starting in late June and early July is a real one, and worth deciding deliberately rather than by accident.
6. The first few years matter more than the rest
Two retirees can average the same investment return over twenty years and end up in completely different positions, purely because of when the bad years landed.
The reason is that you're selling assets to fund your income. A market fall early in retirement means you're drawing down on a shrunken balance, and there are fewer units left to recover when markets do. The same fall fifteen years later does far less damage. This is known as sequencing risk.
It's the mathematical reason the drawdown setting and the investment setting can't be decided separately, and why many retirement plans hold a cash or defensive buffer to draw from instead of selling growth assets in a downturn.
FAQs
Yes. Allocated pension is the older name for the same product. Funds and statements still use both terms.
It depends on your age: 4% of your balance under 65, rising in steps to 14% at 95 and over.
(Source: ATO Payments from super)
No, not once your pension is in the retirement phase. You can increase your payments or take lump sums. The 10% maximum only applies to transition to retirement pensions.
(Source: ATO Retirement withdrawal – lump sum or income stream).
Yes. It's your own money, invested in markets, and it lasts as long as the balance does. That's why the drawdown and investment settings matter so much, and why the Age Pension exists as the safety net underneath.
It can. Once you reach Age Pension age, your super and account-based pension are assessed under the assets and income tests, so the way you structure your retirement savings can change your entitlement.
(Source: Services Australia - Who Can Get Age Pension?)
Getting your structure right before you get started
Turning your super into an income is a set of decisions, not a form. The drawdown, the investments and the Age Pension interaction all get decided at the start, and the defaults aren't designed around you.
Book a free discovery call with our financial advisers, who can discuss your account-based pension with you.
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