For most Australians, the account-based pension is the engine that converts decades of super saving into actual retirement income. It’s also one of the most misunderstood products in the retirement system, not because it’s complicated, but because the decisions you make when setting one up have consequences that play out over 20 to 30 years.
This guide covers exactly how an account-based pension works, what the 2025-26 minimum drawdown rates mean in practice, how payments are taxed, how it interacts with the Age Pension, what happens to it when you die, and what you actually need to think about when setting one up.
What Is an Account-Based Pension?
An account-based pension (also called an allocated pension or retirement income stream) is a superannuation product that pays you a regular income from your super balance in retirement. Instead of taking your super as a lump sum, you leave it invested inside the super system in pension phase and draw it down over time as income.
The key features in plain terms:
Your balance stays invested in the investment options you choose, continuing to earn returns. Investment earnings on assets supporting the pension are taxed at 0% once you’re in full retirement phase, compared to 15% in accumulation phase. Income payments after age 60 are completely tax-free from a standard taxed super fund. You must draw a minimum amount each year based on your age and balance. There is no maximum on how much you can draw once you’ve fully retired. You can take additional lump sum withdrawals at any time. The pension continues until your balance runs out or you die, it is not a guaranteed income for life.
Source: ATO: Account-based pensions
Who Can Start an Account-Based Pension?
You can open an account-based pension once you have met a condition of release. The two most common conditions are:
You’ve reached your preservation age (60 for anyone born after 30 June 1964) and have retired from the workforce, meaning you’ve left an employment arrangement with no intention of returning to full-time or part-time work at or above 10 hours per week.
Or you’ve turned 65, regardless of whether you’re still working.
If you’re between 60 and 64 and still working, you can access a limited version called a Transition to Retirement (TTR) pension. This has a 10% annual drawdown cap and earnings inside the pension are still taxed at 15%, not 0%. The TTR pension converts to a full account-based pension once you fully retire or turn 65. Scott covered the difference between preservation age and actual retirement access in Episode 18 of the Wealthlab podcast, “Is 61 the New Retirement Age in Australia?”
The 2025-26 Minimum Drawdown Rates
The government sets minimum annual drawdown rates based on your age. You must withdraw at least this percentage of your account balance each financial year or your pension loses its tax-free earnings status.
| Age at 1 July | Minimum annual drawdown |
|---|---|
| Under 65 | 4% |
| 65 to 74 | 5% |
| 75 to 79 | 6% |
| 80 to 84 | 7% |
| 85 to 89 | 9% |
| 90 to 94 | 11% |
| 95 and over | 14% |
Source: ATO minimum annual payment for superannuation income streams. Current as at May 2026.
How the minimum is calculated: The percentage applies to your account balance at 1 July each financial year. If you open your pension mid-year, the minimum is pro-rated for the remaining days in that financial year. If you start a pension on 1 November with a $500,000 balance at age 63, your minimum for that year is 4% × $500,000 × (8/12) = $13,333.
The minimum is a floor, not a recommendation. Most financial planners suggest drawing more than the minimum in the early, active years of retirement when spending is typically higher and health is good, then reducing drawdowns in later years as the Age Pension fills more of the income gap. Drawing only the minimum throughout retirement often leaves retirees with more money at 85 or 90 than they needed, having been more frugal in their most active years than was necessary.
Note: The government temporarily halved the minimum drawdown rates during COVID (2019-20 to 2022-23) to reduce forced selling during volatile markets. Normal rates have applied since 1 July 2023.
Is There a Maximum Drawdown?
Once you are in full retirement phase (not a TTR pension), there is no maximum on how much you can draw. You can take lump sum withdrawals at any time, draw your entire balance in one go, or set a regular income well above the minimum.
The question of how much to draw is one of the most consequential decisions in retirement, and it runs in both directions. Drawing too little means leaving money in super longer than necessary, it grows, you might pay more tax eventually through death benefits to non-dependants, and you’ve lived more frugally than you needed to. Drawing too much too early depletes the balance faster, reduces investment returns, and may affect Age Pension eligibility in ways you didn’t plan for.
A sustainable drawdown rate for most Australian retirees is broadly considered to be around 3.5% to 5% of the initial balance per year, depending on age at retirement and whether Age Pension income supplements the drawdown over time.
Tax Treatment: Where the Account-Based Pension Really Wins
The tax treatment of an account-based pension is one of the most significant advantages in the Australian retirement system. Most people know payments are tax-free after 60, fewer appreciate just how much the 0% earnings tax inside pension phase is worth.
Income payments at age 60 and over (taxed super fund): Completely tax-free. This applies to both regular payments and any lump sum withdrawals from the account. The income doesn’t appear on your tax return and doesn’t affect Medicare levy calculations or other income-tested thresholds.
Investment earnings inside pension phase: Once your super converts to a full account-based pension (not TTR), earnings on assets supporting the pension are taxed at 0%. This compares to 15% in accumulation phase. On a $600,000 balance earning a net 6% return, that’s $36,000 per year in earnings — and the difference between 0% and 15% tax on that is $5,400 per year in additional compounding. Over 20 years, that tax difference is significant.
Age 55 to 59 (TTR or early access): Payments from a TTR pension are taxed at your marginal rate with a 15% offset applied to the taxable component. This is still usually more tax-effective than taking the equivalent as salary, but it’s not the full tax-free treatment.
How an Account-Based Pension Affects the Age Pension
This is where the most planning value sits, and where most Australians don’t get nearly enough advice.
Your account-based pension interacts with the Age Pension in two separate ways, and both apply simultaneously. The one that gives you less pension is the one Centrelink uses.
The Assets Test
Your account-based pension balance is assessed as a financial asset at its current balance. As at March 2026, the key homeowner thresholds are:
| Full pension threshold | Part pension cut-off | |
|---|---|---|
| Single homeowner | $321,500 | $722,000 |
| Couple homeowners (combined) | $481,500 | $1,085,000 |
Current as at March 2026. Updated each March and September. Source: Services Australia
The Income Test (Deeming)
Rather than assessing what your pension actually pays you, Centrelink deems your account-based pension balance to earn income at set rates. As at March 2026:
Lower deeming rate: 1.25% on the first $64,200 (singles) or $106,200 (couples) of financial assets. Upper deeming rate: 3.25% on amounts above those thresholds.
This deemed income is added to any other assessable income to determine your pension entitlement. If your actual return is higher than the deeming rate ,which for a balanced fund in a good year it often is, you’re still only assessed on the deemed amount.
The Natural Interaction Over Time
Here’s the planning insight most people miss. As you draw from your account-based pension, your balance gradually falls. Lower balance means lower assessable assets under the assets test, and lower deemed income under the income test. Both effects work in your favour: as your super goes down, your Age Pension entitlement goes up.
This creates a natural income floor. Even as super reduces over retirement, the Age Pension rises to partially replace it. For most Australians, this means the total combined income from super drawdown plus pension remains relatively stable across retirement, even as the super balance depletes.
Phil and Dan walked through exactly this dynamic with real worked examples in Episode 10 of the Wealthlab podcast, “How the Age Pension Really Works.” The episode shows how drawdown strategy in the early years of retirement can materially change the Age Pension entitlement you eventually receive.
Account-Based Pension vs Lump Sum
The choice between converting super to an account-based pension versus taking some or all of it as a lump sum is significant. Here’s the honest comparison:
A lump sum sitting in a bank account is also assessed under the Age Pension assets and income tests, it doesn’t disappear from Centrelink’s view just because it’s outside super. But interest earned on cash is taxed at your marginal rate, while earnings inside an account-based pension are taxed at 0%. For most retirees, keeping money inside pension-phase super is significantly more tax-efficient than taking it as cash.
The case for a partial lump sum is legitimate in specific situations: paying off a mortgage, making a major one-off purchase, or directing some capital into a specific investment. Many Australians take a partial lump sum at retirement for a defined purpose and convert the remainder to an account-based pension. Both can be done at the same time.
The case for the full account-based pension is that the 0% earnings tax environment is the most tax-efficient long-term holding structure available for retirement savings in Australia. Unless you have a specific reason to pull money out of super, keeping it invested in pension phase and drawing an income stream is generally the better approach.
The Transfer Balance Cap: The Limit You Need to Know
There is a government cap on how much super can be in pension phase. This is the transfer balance cap.
From 1 July 2025, the general transfer balance cap is $2 million. If your total super balance exceeds $2 million and you want to start an account-based pension, only $2 million can move into pension phase. The remainder stays in accumulation phase and continues to be taxed at 15% on earnings.
The ATO tracks this through a personal transfer balance account, which records every transfer into and out of pension phase across your lifetime. If you exceed your cap, the ATO will direct you to remove the excess and you’ll pay tax on the notional earnings on the excess amount.
For most Australians, the transfer balance cap is not a constraint. But for those with larger balances, and particularly couples where both partners have significant super, it’s worth understanding before you start a pension.
Source: ATO: Transfer balance cap. Current as at May 2026.
Investment Strategy Inside an Account-Based Pension
Once your super converts to pension phase, your account remains invested. This is where a lot of retirees make the same mistake: they shift to a very conservative option on the day they retire and miss years of growth returns during what could be a 25 to 30-year retirement.
Scott addressed this directly in Episode 1 of the Wealthlab podcast, “Why Playing It Safe in Retirement Can Cost You More.” The numbers are stark: a couple with $500,000 spending $75,000 per year, a growth portfolio funds to their late 90s, a conservative portfolio runs out 15 years earlier. The same average return delivered in a different sequence changes the outcome completely.
The bucket strategy is the most widely used approach among Australian financial planners for managing investment risk inside an account-based pension. The concept:
Keep 12 to 24 months of income needs in cash or a term deposit inside your pension account. This is your drawdown bucket, you draw from here for living expenses. The remaining balance stays invested in growth-oriented options. When cash is running low, you sell from the growth bucket to refill. In a down market year, you draw from cash rather than forced-selling growth assets at a low price.
This structure protects against sequence-of-returns risk (the risk that a bad market run in the first few years of retirement permanently damages your balance) without sacrificing the long-term returns that keep the pension sustainable for decades.
The right investment allocation depends on your age, health, spending needs, other income sources, and attitude to short-term volatility. It’s worth getting right at the outset rather than defaulting to whatever the fund’s lifecycle strategy does.
What Happens to Your Account-Based Pension When You Die
The remaining balance is paid as a super death benefit. Who receives it and how it’s taxed depends on how you’ve set up your nominations.
Reversionary beneficiary: If you nominate a reversionary beneficiary (typically your spouse), they continue receiving your pension payments after your death as if the pension were theirs. The pension doesn’t stop and restart, it continues seamlessly. A reversionary pension counts against the surviving spouse’s transfer balance cap at the original balance at date of death.
Binding death benefit nomination to a dependant (spouse or financially dependent person): The balance can be paid as a lump sum or pension and is generally tax-free.
Binding death benefit nomination to an adult non-dependant (adult child who is financially independent): The taxable component of the death benefit is taxed at 17% (15% plus Medicare levy). This can be a significant sum on a large account-based pension balance.
No nomination or non-binding nomination: The super fund trustee decides who receives the benefit. They’ll generally follow your wishes, but they’re not legally obligated to.
This is why binding death benefit nominations matter, and why they need to be kept current. Most standard binding nominations expire every three years. An expired nomination is effectively no nomination.
Scott and Phil covered death benefits, blended family situations, and why the nomination decision is more consequential than most people realise in Episode 12 of the Wealthlab podcast, “Super vs Inheritance: How Death and Gifting Impact Your Pension.”
How to Set Up an Account-Based Pension: The Decisions That Matter
The administrative process of starting an account-based pension is straightforward. The decisions within that process are where the planning value sits.
Which fund to use. You can open a pension with your existing super fund or roll to a different fund. Not all accumulation funds have equally competitive pension products. Fees can be different in pension phase, investment options can be different, and some funds have better tools for managing drawdown strategy. Worth checking before assuming your accumulation fund is the right pension fund.
How much to transfer. If you have flexibility, you don’t have to convert your entire super balance. Some people keep a portion in accumulation — for example, if one partner’s balance will continue to receive employer contributions for a period, or for specific tax planning reasons. Get advice on the right split.
Investment option. Don’t default to whatever the fund selects automatically. Think about the bucket strategy, your overall investment mix, and how it aligns with your drawdown timeline.
Drawdown amount and frequency. Set your regular income payment at what you actually need to live on, not the minimum. Most retirees are better served drawing realistically from the start. Monthly payments are most common and align best with regular expense management.
Notify Centrelink. If you’re already receiving the Age Pension, starting or changing an account-based pension affects your assets and income test assessment. You’re required to notify Services Australia within 14 days. Missing this can cause overpayments that Centrelink will claw back.
FAQs
What is an account-based pension in Australia?
An account-based pension (also called an allocated pension) is a product that converts your accumulated super balance into a regular retirement income stream. Your balance stays invested inside the super system in pension phase, earnings are taxed at 0%, and payments after age 60 are completely tax-free from a standard taxed fund. You must draw a minimum amount each year based on your age, and there is no maximum drawdown in full retirement phase.
What are the minimum drawdown rates for an account-based pension in 2025-26?
The minimum is 4% for those under 65, rising to 5% from 65 to 74, 6% from 75 to 79, 7% from 80 to 84, 9% from 85 to 89, 11% from 90 to 94, and 14% for those aged 95 and over. These are applied to your account balance at 1 July each year. Current as at May 2026. Source: ATO.
Is income from an account-based pension taxable?
For most Australians aged 60 and over in a standard taxed super fund, income from an account-based pension is completely tax-free. It does not appear on your tax return. Investment earnings inside pension phase are also taxed at 0%, compared to 15% in accumulation phase.
How does an account-based pension affect the Age Pension?
Your account-based pension balance is assessed under the Age Pension assets test at its current value. It is also deemed to earn income under the income test, regardless of what it actually earns. As your balance reduces over retirement, your assessable assets and deemed income reduce, which typically increases your Age Pension entitlement over time. Getting the drawdown strategy right in the early years of retirement can materially affect the pension you receive from age 67 onwards.
What is the transfer balance cap for 2025-26?
The general transfer balance cap increased to $2 million from 1 July 2025. This is the maximum amount that can be held in pension phase across all your super accounts. Amounts above the cap must remain in accumulation phase. Current as at May 2026. Source: ATO.
What is the difference between an account-based pension and a transition to retirement pension?
A transition to retirement (TTR) pension can be started at preservation age (60) while still working. It has a 10% annual maximum drawdown and earnings inside the pension are taxed at 15%, not 0%. A full account-based pension is available once you’ve fully retired or turned 65. It has no maximum drawdown cap and earnings are tax-free. The TTR converts to a full account-based pension automatically once you meet the conditions.
What is a reversionary beneficiary for an account-based pension?
A reversionary beneficiary is a person (usually a spouse) who automatically continues receiving your pension payments after your death, rather than the pension being commuted to a lump sum death benefit. It provides continuity of income for a surviving partner. The continued pension counts against the reversionary beneficiary’s transfer balance cap at the balance at date of death, which is an important planning consideration for couples with larger combined super balances.
Can I still contribute to super if I have an account-based pension?
You cannot make contributions directly into an account-based pension account, it is in drawdown mode only. However, you can maintain a separate accumulation account alongside your pension to receive employer contributions or make voluntary contributions (subject to eligibility rules and contribution caps).
How long will my account-based pension last?
It depends on how much you draw each year, your investment returns, fees, and how long you live. There is no guaranteed term. Our free Wealthlab super calculator lets you model how long your balance might last at different drawdown rates and return assumptions.
Getting the Setup Right
An account-based pension is not a set-and-forget product. The investment mix, drawdown rate, Age Pension interaction, and death benefit nominations all need to be reviewed as your circumstances change through retirement.
At Wealthlab, we help Australians structure account-based pensions to maximise income, minimise tax, protect Age Pension eligibility, and ensure the right people receive the right benefits when the time comes. If you’d like to talk through your own situation, book a free chat with the team. No jargon, no pressure.