Account-Based Pension: How It Works, Rules and Drawdown
Learn how an account-based pension works in Australia, tax benefits, minimum drawdown rules, the transfer balance cap, and a worked example.
By Timothy Hirou GaschereauPublished 10 min read
Try it yourself
This article is general information only, not financial or tax advice. This is part of a wider guide to retirement and FIRE on Snowball Invest.
Quick answer
An account-based pension (also called an allocated pension) is a retirement income stream you start by converting your superannuation savings into pension phase. Your balance stays invested, you draw regular income from it, and once you're 60 or older, both the investment earnings and the income payments are completely tax-free. You must withdraw a government-set minimum each year, and there's a cap (the Transfer Balance Cap) on how much you can move into the tax-free pension environment in the first place.
In this guide
- →What an account-based pension actually is, and how it differs from an annuity
- →How to set one up, step by step
- →The tax advantage, and exactly what changes once you're 60
- →The minimum drawdown rules, and where to find the full table
- →The Transfer Balance Cap, the lifetime limit on tax-free pension phase
- →A full worked example for someone starting a pension at 67
📥 What is an account-based pension?
🎯 The essential: An account-based pension converts your super into a retirement income stream once you've met a condition of release, tax-free from age 60.
An account-based pension is a retirement income stream funded from your super savings. You start one once you've met a condition of release, typically retiring after reaching your preservation age, or turning 65.
It's also called an allocated pension. This is your own money, you're not receiving a government payment or an insurer's promise. When it runs out, it runs out. Payment frequency options vary by fund: monthly, quarterly, half-yearly or annually.
Some retirees top up their balance before starting one, for example with a downsizer contribution from a home sale, which sits outside the normal contribution caps.
⚖️ Account-based pension vs annuity
| Account-based pension | Annuity | |
|---|---|---|
| Whose money? | Yours, you own the balance | You hand a lump sum to an insurer |
| Investment risk | You bear it | Insurer bears it |
| Income | Flexible (subject to minimum) | Fixed, often guaranteed for life |
| Can it run out? | Yes | No (if lifetime annuity) |
| Residual balance | Yes, can be left to beneficiaries | Usually none |
| Flexibility | High | Low |
Neither is universally better, it depends on your priorities around flexibility, certainty and longevity risk.
🛠️ How to set one up
The process is called commuting your super. Broadly:
- Confirm you've met a condition of release, see our preservation age guide.
- Choose how much to commute, subject to the Transfer Balance Cap.
- Select your investment options.
- Set your income amount and frequency.
- Nominate a beneficiary, see our guides to reversionary pensions and binding death benefit nominations for what happens when you die.
💰 The tax advantage
Aged 60 or over: investment earnings inside the pension are taxed at 0% (versus up to 15% in accumulation), and income payments you receive are also taxed at 0%.
On a $700,000 balance earning 7% a year, the fund generates $49,000 in earnings. In accumulation phase, up to $7,350 could be lost to tax. In pension phase, you keep it all.
Aged 55-59: payments are taxable at your marginal rate, but with a 15% tax offset. If you're not fully retired and using a Transition to Retirement income stream instead, earnings on the assets supporting it are still taxed at up to 15%, the same as accumulation, not the 0% that applies to a full account-based pension.
📏 Minimum drawdown rules
You must withdraw at least a minimum percentage of your balance each year, calculated from your balance at 1 July. The percentage increases with age, see our minimum pension drawdown rates by age article for the full table rather than us repeating it here.
There's no maximum on a full retirement account-based pension. A TTR income stream has a 10% maximum cap per year instead, which disappears once you meet a full condition of release. Missing the minimum by 30 June can mean the pension is treated as having ceased for tax purposes.
🧢 The Transfer Balance Cap
There's a limit on how much super you can move into the tax-free pension environment in the first place, see our Transfer Balance Cap glossary entry for the current figure and how it's indexed.
This is a lifetime cap applying across all your pension accounts combined. If you have more super than the cap, the excess stays in accumulation (taxed at up to 15%) or gets withdrawn. Exceeding the cap triggers excess transfer balance tax.
📈 Retirement Income Calculator
Model your own drawdown rate against your balance, investment returns and the Age Pension.
🌱 Can you keep contributing? Does it keep growing?
You can't make further contributions to that specific pension account once it's in pension phase, though you can start a new accumulation account alongside it. The balance can grow with investment returns and shrink with drawdowns and fees. Longevity risk is real, if you live longer than your balance lasts, the pension ceases.
🧮 Worked example: starting one at 67
Alex, aged 67, retires with $700,000 in super and commutes the full amount, well under the Transfer Balance Cap. The minimum drawdown at 65-74 is 5%, giving a minimum of $35,000 a year. Alex receives exactly $35,000 a year, paid monthly. Assuming a 6% investment return, that's $42,000 in earnings, all tax-free since Alex is over 60.
| Amount | |
|---|---|
| Opening balance | $700,000 |
| Investment earnings (6%) | +$42,000 |
| Drawdown | -$35,000 |
| Closing balance (approx.) | $707,000 |
Alex could withdraw more than $35,000 if needed, there's no maximum in full retirement phase.
🚫 3 common misconceptions
"It's like an annuity, a fixed guaranteed income." Wrong, income is flexible and the balance fluctuates with markets.
"Once it's a pension, I can't touch the money until a certain age." Wrong, you can withdraw lump sums at any time once the pension has started.
"The minimum drawdown is the maximum." Wrong, it's a floor, not a ceiling, except for a TTR income stream, which has a 10% cap.
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❓ Frequently asked questions
What's the difference between an account-based pension and a super account?
+
Accumulation phase grows your super before retirement, with earnings taxed at up to 15%. Pension phase is what you convert to at retirement, with tax-free earnings and tax-free income once you're 60 or older.
Can I have an account-based pension and still work?
+
Yes, as long as you've met a condition of release, for example turning 65. If you haven't, a Transition to Retirement income stream is the alternative while still employed.
What happens to my account-based pension when I die?
+
It's paid to your nominated beneficiary or your estate, depending on how you've structured it. See our guides to reversionary pensions and binding death benefit nominations for how to set that up in advance.
Is my account-based pension included in the Age Pension means test?
+
Yes, it's included in both the income test and the assets test.
Can I have more than one account-based pension?
+
Yes, across different funds, but the combined value is tracked against your single personal Transfer Balance Cap.
What if my balance runs out?
+
The pension ceases. Depending on your other assets and income, you may become eligible for a full Age Pension at that point.
Do I have to start one, or can I leave my super in accumulation?
+
You can stay in accumulation indefinitely, but you'll miss out on the tax-free earnings advantage that pension phase offers once you're eligible.
📚 Recommended reading
Retirement Made Simple
Noel Whittaker
Australia's godfather of personal finance demystifies super, the pension and making your savings last. The plain-English retirement handbook every Aussie should read before they stop working.
Super Made Simple
Noel Whittaker
A focused, up-to-date guide to actually understanding your superannuation, from one of Australia's most trusted finance writers.
Die With Zero
Bill Perkins
Stop hoarding cash for a someday that never comes. Perkins makes the case for spending on experiences while you are still young enough to enjoy them.
Some links above are affiliate links. If you buy through them, Snowball Invest may earn a small commission at no extra cost to you. We only recommend books we'd suggest anyway.
Sources
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Timothy Hirou Gaschereau
Founder of Snowball Invest, not a financial adviser.
I write about what I'm learning myself, because nobody ever taught us how to take control of our own money. It's a skill, not a mystery, and it's never too late to learn it. The best day to start was yesterday, the second best is today.
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