An account based pension is a retirement income stream paid directly from your super savings once you meet specific eligibility criteria. Unlike the government Age Pension, this is your own money—converted from accumulation phase super into regular payments deposited into your bank account.
An account-based pension is a popular Australian retirement product that converts superannuation savings into a regular, flexible, and tax-effective income stream. It provides a regular income stream bought with your superannuation savings at retirement.
For Australians aged 55–75, understanding how an account based pension works is essential. Around 40% of retirees rely on super-derived income streams to supplement government payments, and with life expectancy now averaging 83 years for men and 87 for women, getting your retirement income strategy right matters.
This guide covers the mechanics, tax benefits, withdrawal rules, timing considerations, Centrelink implications, and common mistakes. All figures are current as at 1 July 2025 and may change. This is general information only—not personal advice and forms a key part of a broader retirement strategy, particularly when building a structured plan for generating income in retirement.
Introduction to Account Based Pensions
An account based pension is a flexible retirement income stream that lets you draw regular, tax-effective income from your superannuation savings once you retire. Also known as a retirement income account, this type of pension is designed to turn your super savings into a steady flow of income, helping you cover living expenses and maintain your lifestyle throughout retirement.
With an account based pension, you have control over how much income you withdraw and how often you receive payments, making it easy to tailor your retirement income to your needs. The account based pension works by keeping your superannuation savings invested, so your balance can continue to benefit from investment returns. If you’re over 60, both your pension payments and the investment earnings within your account are generally tax free, making this a highly tax effective way to access your super in retirement.
This regular income stream can be adjusted as your circumstances change, giving you the flexibility to manage your retirement income and ensure your money lasts as long as possible. Whether you want to take out more income for travel or reduce payments to preserve your balance, an account based pension offers the freedom to make those choices as your retirement evolves.
How an account based pension works
An account based pension is purchased with your super when you retire or meet a condition of release. The basic mechanics are straightforward:
You can transfer a portion or all of your super from an accumulation account into a separate pension account to establish an account-based pension
Your money remains invested in your chosen investment options
You receive regular payments into your bank account
Payments continue until the account runs out or is fully withdrawn
An account based pension is not guaranteed for life. Your income depends on how your investments perform and how much you withdraw. If investments perform well, your account balance can increase, providing more income from your account-based pension. You typically choose your payment frequency (monthly, quarterly, half yearly, or annually) and your investment mix.
A standard retirement phase account based pension starts after you retire or reach age 65. A transition to retirement pension (TTR pension) can start after preservation age while still working, but has stricter rules.
Types of Pensions
When planning for retirement, it’s important to understand the different types of pensions available. The main options include account based pensions, allocated pensions, and government pensions such as the Age Pension.
An account based pension is a self-funded income stream created from your accumulated superannuation savings. It provides flexibility in how much income you receive and allows you to benefit from ongoing investment returns. Allocated pension is simply an older term for the same product, so you may see both terms used interchangeably.
In contrast, the Age Pension is a government-funded payment designed to provide a safety net for eligible retirees. While account based pensions rely on your own superannuation savings, the Age Pension is means-tested and paid by the government to help cover basic living costs.
Understanding the differences between these based pensions is essential for making informed decisions about your retirement income. By knowing how each type of pension works, you can better plan for a secure and comfortable retirement.
Eligibility and when you can start an account based pension
Timing is critical. You become eligible for an account-based pension when you reach preservation age and meet a condition of release. You can open an account-based pension when you reach your preservation age and have stopped working for your current employer.
Preservation age by birth date:
Born before 1 July 1960: age 55
1 July 1960 – 30 June 1961: age 56
1 July 1961 – 30 June 1962: age 57
1 July 1962 – 30 June 1963: age 58
1 July 1963 – 30 June 1964: age 59
Born on or after 1 July 1964: age 60
Common conditions of release:
Reaching preservation age and retiring
Ceasing employment after age 60
Reaching age 65 (no retirement required)
Permanent incapacity or terminal illness
Someone born in 1962 can access a TTR pension at age 58 while working. As you approach retirement, a transition to retirement (TTR) pension allows you to begin planning and accessing your superannuation while still working, providing flexibility as you near the end of your working life. Someone born in 1966 must wait until at least age 60. Starting too early and drawing high payments can erode your super money before you fully retire. Understanding when to start a pension is closely linked to knowing whether you are financially ready to retire.
How your pension is invested
Your account based pension account remains an investment account subject to market performance. Most super funds offer options including:
Defensive: cash, term deposits, fixed interest
Balanced: diversified mix of growth and defensive assets
Growth: higher allocation to shares and property
Investment choice affects your balance volatility, expected investment returns, and how long your remaining money lasts. Most experts recommend maintaining 40–60% in growth assets even in retirement to combat 2–3% annual inflation.
Sequencing risk is real: large market falls early in retirement can permanently reduce how long your money lasts, especially when combined with regular income payments. Review your investment options every 1–2 years. This highlights the importance of adjusting your investment approach as you transition into retirement.
Withdrawal rules: minimums, maximums and access to lump sums
The government sets minimum annual withdrawal rates based on your age group. For a standard retirement phase pension, there is no maximum.
Minimum drawdown rates (1 July 2025):
Age | Minimum % of 1 July balance |
|---|---|
Under 65 | 4% |
65–74 | 5% |
75–79 | 6% |
80–84 | 7% |
85–89 | 9% |
90–94 | 11% |
95+ | 14% |
The minimum amount is calculated each financial year on your 1 July account balance. You choose payment frequency but must meet the annual minimum.
Example: $600,000 balance at age 67 = 5% minimum = $30,000 per year ($2,500 monthly).
For retirement phase pensions, you can take lump sum payments anytime. TTR pensions have a 10% maximum and no lump sum access until you meet another condition of release.
Drawing only the minimum helps your money last longer. Higher withdrawals shorten your pension’s life considerably. Withdrawal decisions should also be considered in the context of your overall retirement plan and income needs.
Tax on account based pensions
Tax treatment is a key advantage. For those aged 60 or over in retirement phase:
Pension payments are tax free
Investment earnings within the account are tax free (0% rate)
This applies up to the transfer balance cap
Transfer balance cap: This limits how much super you can move into tax free retirement phase pensions. The general cap is $2 million from 1 July 2025 (indexed to CPI). Amounts above must stay in accumulation phase (taxed up to 15% on earnings) or be withdrawn.
For those under 60, pension payments include assessable taxable income, though a 15% tax offset usually applies to the taxable component.
TTR pensions remain in non-retirement phase—earnings are taxed at up to 15% even if you’re over 60.
Tax comparison: $800,000 in accumulation earning $80,000 incurs approximately $12,000 tax. The same amount in retirement phase pension = $0 tax. That’s $12,000 annual savings.
How long will an account based pension last?
An account based pension does not guarantee income for life. It lasts only while there is money left in the account.
Factors affecting duration:
Starting balance
Net investment returns (after fees and tax)
Annual withdrawal rate and lump sums
Account based pension fees
A 67-year-old with $700,000 drawing the 5% minimum could sustain income for 30+ years at moderate returns. Drawing 8% annually could exhaust the balance in under 20 years—worse if markets fall early.
Use your super fund’s retirement calculator to model your own financial situation. Combining an account based pension with the Age Pension helps manage longevity risk.
Account based pensions and Centrelink / Age Pension
Government pensions are means-tested, meaning eligibility is based on income and assets. Government pensions provide fixed payments that are determined by a means test, which considers income, assets, and relationship status. Your account-based pension is assessed by Centrelink under both the income and assets tests, which can affect your eligibility for government pensions.
Your account based pension counts in both the assets test and income test for the government Age Pension.
Assets test: Your account balance is counted as financial assets. Thresholds vary by homeowner status and relationship status. Approximate 2025 limits: single homeowner ~$314,000; couple ~$470,000.
Income test: Account based pensions are assessed under deeming rules—0.25% on the first threshold amount, then 2.25% above. Your deemed income affects Age Pension entitlements.
Example: A couple with $400,000 in an account based pension plus $50,000 in bank accounts has combined financial assets of $450,000. Deeming calculates assumed income, which reduces their Age Pension entitlement accordingly.
Commuting or restructuring pensions can change Centrelink treatment—check implications before making changes. These rules sit within the broader framework of how Centrelink assesses income and assets in retirement.
Other strategies, such as gifting, can also affect Age Pension entitlements and should be carefully considered.
Combining Pensions
Many Australians choose to combine an account based pension with government pension payments to create a more reliable and comfortable retirement income. By using your superannuation savings to start an account based pension, you can supplement the regular income provided by the Age Pension, giving you greater financial security and flexibility.
This approach allows you to enjoy the tax benefits and investment growth potential of an account based pension, while also receiving the stability of government pension payments. The combination of these income streams helps ensure you have enough regular income to maintain your lifestyle and cover essential expenses throughout retirement.
Account based pensions offer the flexibility to adjust your payments as your needs change, while the Age Pension provides a safety net with fixed, means-tested payments. By blending these sources, you can create a retirement income strategy that balances security, flexibility, and growth, helping you make the most of your superannuation savings and enjoy a more comfortable retirement.
Common mistakes with account based pensions
Starting too early: Beginning a TTR pension while earning a good salary and withdrawing more income than needed erodes super invested for later.
Withdrawing too much: Regularly taking 7–8% instead of the minimum can halve your pension’s longevity. Understand how much income you actually need.
Poor investment choices: Moving everything to cash loses long-term investment growth. Staying too aggressive increases volatility risk during drawdowns.
Ignoring fees and the transfer balance cap: Not comparing products, or exceeding the cap, can trigger unexpected tax effective income reductions.
Centrelink timing errors: Restructuring pensions without checking Age Pension implications can slash entitlements.
No estate planning: Failing to update beneficiary nominations or understanding how super death benefits are taxed for adult children versus spouses.
Many of these issues form part of broader retirement planning mistakes that can significantly impact long-term outcomes. Review your settings regularly and seek advice before major changes.
What happens to an account based pension when you die?
Any remaining balance passes to your beneficiaries or estate. Key considerations:
Binding vs non-binding nominations determine who receives the benefit
Reversionary pensions allow a spouse to continue receiving payments
Tax treatment varies: spouse or dependent child receives tax free income; non-dependant adult children may pay tax on the taxable component (approximately 15% plus Medicare levy)
Children’s pensions must typically cease by age 25 unless the child has a permanent disability.
Coordinate super beneficiary nominations with your Will. Review after divorce, remarriage, or a partner’s death.
Pros and cons of an account based pension
Advantages:
Tax effective structure (tax free income and earnings after 60)
Flexible withdrawal amounts including lump sums
Investment choice and control over your super account
Works alongside the Age Pension and other investments
Disadvantages:
No guaranteed lifetime income—account runs out eventually
Exposure to market volatility and sequencing risk
Requires ongoing informed decisions about withdrawals and investments
Complexity around Centrelink, transfer balance cap, and estate planning
A 67-year-old couple with moderate super seeking flexibility may benefit greatly. A single retiree with minimal savings relying mainly on the Age Pension might prefer simpler options.
Retirement Planning
Effective retirement planning is key to ensuring you have enough income to support your lifestyle once you stop working. An account based pension can play a central role in your retirement plan, offering a regular income stream and the flexibility to manage your withdrawals according to your needs.
When planning your retirement, consider important factors such as your preservation age (the age you can access your super), the minimum drawdown rate (the minimum amount you must withdraw each year), and the transfer balance cap (the maximum you can transfer into a tax-free retirement income stream). It’s also crucial to estimate your living expenses and determine how much income you’ll need to maintain your desired lifestyle.
Account based pensions provide valuable tax benefits, especially if you’re over 60, making them a tax effective way to access your super. Seeking professional advice can help you make informed decisions about your retirement income options, ensuring your account based pension is structured to meet your goals and comply with all relevant rules.
Case Studies
Real-life examples can help you see how account based pensions work in practice and how they can be tailored to different retirement needs.
Case Study 1: Supplementing the Age Pension Margaret, aged 67, has $350,000 in superannuation savings. She starts an account based pension to provide regular income payments, while also qualifying for a part Age Pension from the government. By combining her account based pension with the Age Pension, Margaret enjoys a more comfortable retirement income, benefiting from both the flexibility and tax benefits of her super and the security of government support.
Case Study 2: Managing Retirement Income and Payments John, aged 62, retires with $800,000 in his super fund. He uses his super to start an account based pension, choosing to receive higher payments in the first few years to fund travel and home renovations, then reducing his withdrawals to the minimum drawdown rate to help his balance last longer. Because John is over 60, his pension payments and investment earnings are tax free, allowing him to maximise his retirement income and manage his living expenses effectively.
These case studies show how account based pensions can be used to create a flexible, tax effective retirement income stream that adapts to your changing needs and goals.
Frequently asked questions about account based pensions
Is an account based pension the same as an allocated pension? Yes. “Allocated pension” is an older term for the same product.
What’s the difference between an account based pension and a term allocated pension? Term allocated pensions have fixed terms and specific Centrelink rules. They generally cannot be newly started since March 2007.
Can I add more money to an existing account based pension? No. You must commute the pension, add contributions to accumulation, then start a new pension.
Can I have more than one account based pension? Yes, multiple pensions are allowed.
Can I change investment options after starting? Yes, most funds allow investment changes within your pension account.
What if I miss the minimum withdrawal? The fund may need to adjust or report. Potential tax consequences apply to the fund’s earnings.
How Money Path can help
Understanding how an account based pension forms part of your retirement strategy involves weighing tax, timing, Centrelink, and investment considerations unique to your situation.
Money Path provides comprehensive retirement financial advice to help you decide when to start, choose sustainable withdrawal strategies, and structure your super within transfer balance cap rules.
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Rules change and every financial situation differs. Reading guides like this is a solid start—tailored advice helps before making major decisions about your retirement pension and working life transition.
