A little about account-based pensions
• Super, Pension, transfer balance cap,
Choosing how to draw an income from superannuation is one of the most important financial decisions many clients will make as they approach retirement. While there are several retirement income options available, account-based pensions remain one of the most common.
What’s an account-based pension?
An account-based pension is a retirement-phase income stream funded by transferring money from a superannuation accumulation account into a pension account. The money remains invested and regular pension payments are drawn from the account over time. The balance will generally change according to investment performance, fees and costs, pension payments and any lump-sum withdrawals.
Unlike some other retirement income products, account-based pensions don’t generally provide a guaranteed lifetime income. The account balance will usually reduce over time as pension payments are made, although investment earnings may offset some of that reduction.
Transfer balance cap considerations
A common client question is how much super can be transferred into an account-based pension.
The amount that can generally be transferred to retirement phase is limited by an individual’s personal transfer balance cap. For the 2026–2027 financial year, a person’s transfer balance cap may be between $1.6 million and $2.1 million, depending on their personal circumstances and transfer balance cap history.
Clients with superannuation balances exceeding their available cap may need to leave some funds in an accumulation account or consider other options. The consequences of these choices can vary significantly depending on personal circumstances.
Income payments and minimum drawdowns
Clients often assume they can simply choose any pension amount they’d like to receive. While there’s generally flexibility in determining pension payments, minimum annual drawdown requirements apply. These minimum percentages increase with age and are based on the member’s account balance at 1 July each year. For example, a person aged 65 to 74 must generally draw at least 5% of their account balance during the financial year. It’s worth reminding clients that withdrawing more than the minimum may provide additional income in the short term, but can also reduce how long retirement savings last.
Investment risk remains important
One common misunderstanding is that moving from accumulation phase to pension phase somehow removes investment risk. In reality, account-based pensions remain subject to investment risk because the underlying assets continue to be invested.
Clients often focus on the tax advantages of retirement phase without fully considering how investment choices may affect the sustainability of their retirement income. This can create useful conversations around risk tolerance, expected returns and retirement objectives.
Tax treatment
The tax treatment of account-based pensions is a significant attraction for many retirees.
In general:
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earnings on assets supporting an account-based pension are generally exempt from tax within the super fund; and
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most people aged 60 or over do not pay tax on payments received from a taxed account-based pension.
Clients with very large superannuation balances may face additional tax considerations and should obtain advice about how the rules apply to their circumstances.
Switching funds or changing pension arrangements
People are sometimes surprised to learn that changing investments, switching providers or restructuring pension arrangements can have tax, administrative or financial consequences. Before implementing significant changes, it’s important to understand any costs, restrictions or unintended consequences that may apply.
Getting the basics right matters
For many people, an account-based pension isn’t simply an income product. It sits at the intersection of retirement planning, tax outcomes, investment risk and estate planning. That means the most appropriate retirement income arrangement will often depend on the person’s broader circumstances and objectives. This topic provides an opportunity to remind clients that retirement decisions can have long-term consequences and that appropriately licensed financial advice can be valuable before major decisions are made.
Source: https://moneysmart.gov.au/retirement-income-sources/account-based-pensions