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Account-Based Pensions Explained
The most popular way to turn your super into retirement income.
An account-based pension (also called an "allocated pension" or "account-based income stream") is the most common way Australians access their super in retirement. Rather than taking all your money out as a lump sum, you convert your super into a regular income stream while keeping your money invested.
Think of it like putting your super into "retirement phase" — it stays invested, but now it's paying you a regular income instead of just growing.
✅ Why Account-Based Pensions Are Popular
- Tax-free investment earnings — Earnings inside the pension are taxed at 0% (compared to 15% in accumulation)
- Tax-free income — Pension payments are tax-free if you're 60 or older
- Flexibility — Choose how much to withdraw (above the minimum), when to receive payments, and how to invest
- Your money stays invested — Capital remains in the super environment, potentially continuing to grow
- Centrelink treatment — Different (often more favourable) assessment than lump sums sitting in bank accounts
How an Account-Based Pension Works
Transfer from Accumulation
Move super from accumulation to pension phase
Choose Investments
Select how your money is invested
Set Your Payments
Nominate payment amount and frequency
Receive Regular Income
Payments deposited to your bank account
Each payment you receive reduces your account balance. Your balance also fluctuates based on investment returns (which can be positive or negative). The pension continues until your balance runs out — there's no guaranteed timeframe.
Accumulation vs Pension Phase: Key Differences
📥 Accumulation Phase
Your working years — money going IN
- Contributions going in
- Earnings taxed at up to 15%
- Cannot access (usually)
- No minimum withdrawals
- Building your balance
📤 Pension Phase
Retirement — money coming OUT
- No new contributions allowed*
- Earnings taxed at 0%
- Regular payments to you
- Minimum drawdown required
- Drawing down your balance
*Downsizer contributions can sometimes be added to existing pensions under certain conditions.
Minimum Drawdown Requirements
Once you start an account-based pension, you must withdraw at least a minimum percentage each year. This is the government's way of ensuring super is actually used for retirement income, not just held indefinitely.
| Your Age | Minimum Drawdown | Example ($500,000 balance) |
|---|---|---|
| Under 65 | 4% | $20,000 minimum |
| 65–74 | 5% | $25,000 minimum |
| 75–79 | 6% | $30,000 minimum |
| 80–84 | 7% | $35,000 minimum |
| 85–89 | 9% | $45,000 minimum |
| 90–94 | 11% | $55,000 minimum |
| 95+ | 14% | $70,000 minimum |
The minimum is calculated based on your account balance on 1 July each year (or when you start the pension). There's no maximum — you can withdraw more if you need to.
See full details on minimum drawdown rules →
⚠️ What If You Don't Meet the Minimum?
If you don't withdraw at least the minimum by 30 June, the pension is treated as if it never existed for that year. This means the earnings lose their tax-free status. Your super fund will typically contact you to ensure you meet the minimum.
Tax Treatment
Investment Earnings: 0% Tax
One of the biggest advantages of an account-based pension is that investment earnings are completely tax-free. In accumulation, earnings are taxed at up to 15%. This tax saving alone can make a significant difference over time.
Pension Payments
How your pension payments are taxed depends on your age:
| Your Age | Tax on Payments |
|---|---|
| 60 and over | Tax-free (from a taxed fund — most super funds) |
| Preservation age to 59 | Taxable component taxed at marginal rate, less 15% offset. Tax-free component is tax-free. |
| Below preservation age | Taxable component taxed at marginal rate plus 2% Medicare levy. Tax-free component is tax-free. |
See full details on tax on super withdrawals →
Example: Margaret, Age 67
Margaret transfers $600,000 from her super accumulation account to start an account-based pension. Her pension earns 6% ($36,000) in the first year.
- Tax on earnings: $0 (pension phase earnings are tax-free)
- Minimum drawdown: 5% × $600,000 = $30,000
- Tax on payments: $0 (she's over 60)
If the same money had stayed in accumulation, she'd have paid up to $5,400 in tax on the $36,000 earnings.
Commutation: Converting Pension Back to Lump Sum
A commutation is when you convert part or all of your pension back into a lump sum. This is different from a regular pension payment.
Why would you commute?
- You need a large one-off amount (e.g., to pay off a mortgage)
- You want to rebalance between accumulation and pension
- You need to manage your Transfer Balance Cap
- Estate planning reasons
💡 Commutation vs Pension Payment
The distinction matters for the Transfer Balance Cap:
- Pension payments — Do NOT create a Transfer Balance Cap debit
- Commutations — DO create a Transfer Balance Cap debit (they "reverse" part of your pension)
Centrelink and Account-Based Pensions
Account-based pensions are assessed under deeming rules for Centrelink purposes — the same as financial assets outside super. This replaced the old "income stream" rules for most pensions started after 1 January 2015.
What this means in practice:
- Your pension balance counts as an asset under the Assets Test
- Income is "deemed" based on your balance, not what you actually withdraw
- Higher drawdowns don't necessarily reduce your Age Pension (but lower balances over time will)
Learn more about Centrelink deeming rules →
Starting an Account-Based Pension
To start an account-based pension, you need to:
- Meet a condition of release — Usually age 65, or ceased employment after 60, or retired after preservation age
- Have super to transfer — Either in your current fund or consolidated from multiple funds
- Complete the paperwork — Application form, nominate payment amount/frequency, investment selection
- Nominate beneficiaries — Binding death benefit nomination or reversionary pension nomination
Most super funds offer their own pension products. You can also transfer to a different fund's pension product if you prefer their investment options or fees.
⚠️ Transfer Balance Cap
There's a limit on how much you can transfer into pension phase (currently general cap). If you have more than this, the excess must stay in accumulation. Learn about the Transfer Balance Cap →
Thinking About Starting a Pension?
The decision involves tax, Centrelink, estate planning, and investment considerations. Get it right from the start.
Last updated: January 2026
Disclaimer
NOT PERSONAL ADVICE — these guides are designed to educate. Your situation may have specific considerations. Consider professional advice.