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
• Subject to a transfer balance cap of $2.0 million from 1 July 2025
• 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 is treated as having stopped for income tax purposes at the start of that year. Earnings cease to qualify as exempt current pension income.

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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:

• From age 60, payments from taxed super funds are generally tax free.
• Between preservation age and 59, the taxable component may be taxed at marginal rates with a 15 percent tax offset.
• Before preservation age, different rules apply.

The ATO also provides a super income stream tax offset. For the 2025 to 2026 income year, the maximum offset available on the untaxed element is $12,500.

Outcomes depend on:

• Your age
• The taxable and tax free components
• Whether the fund is taxed or untaxed

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 lifetime limit on how much you can move into tax free retirement phase income streams.

From 1 July 2025, the general transfer balance cap is $2.0 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 percentage of your 1 July account balance based on your age.

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

Minimum rates increase as you age.

Current minimum drawdown rates (2025–26)

• 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%

The minimum is calculated on your account balance at 1 July each year.

If the minimum amount is not paid in a financial year, the pension is 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 transfers the full amount into an account based pension.

If the minimum rate at her age is 4 percent, she must withdraw at least $32,000 in the first financial year.

She can withdraw more 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. Future earnings are taxed at your personal marginal rate.

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

The trade off is flexibility versus longevity risk.

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.

Assessment depends on:

• When the pension started
• Your age
• 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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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
• You want investment control and flexibility
• You are comfortable managing market risk

It may not suit someone who:

• Wants guaranteed lifetime income
• Has very low risk tolerance
• Is relying heavily on Age Pension and needs careful income test management

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

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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 taxable component may be taxed at marginal rates with a 15 percent tax offset. Investment earnings in retirement phase are generally tax free.

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 the minimum is not paid, the pension is taken to have stopped for income tax purposes.

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.