Highlights

  • Account-based pensions are retirement income streams funded from Superannuation savings.
  • The super balance remains invested while regular income payments are drawn.
  • Minimum annual drawdown rates apply, but there is generally no maximum limit.
  • Income is typically tax-free for members aged 60 and over.
  • Earnings within the pension phase are generally tax-free up to the transfer balance cap.
  • Payments stop once the Account Balance is fully exhausted.
  • They offer flexibility but carry Investment, longevity and Inflation risks.
  • The transfer balance cap limits how much can be moved into retirement-phase pensions.

An account-based pension (ABP) is a type of superannuation income stream that pays regular income to a member after they have met a condition of release, such as retirement or reaching age 65. It is one of the most commonly used retirement-phase products in Australia.

The defining feature of an account-based pension is that the member's super balance remains invested, often in the same or similar Options they used in the accumulation phase, while regular payments are drawn from the balance. The remaining balance continues to earn investment returns, which can rise or fall depending on market performance.

Account-based pensions are governed by the Superannuation Industry (Supervision) Act and related tax law. Australian law sets minimum drawdown percentages based on the member's age, but most account-based pensions have no maximum drawdown, allowing members to take additional lump sums if needed.

How an account-based pension works

To start an account-based pension, the member must first have met a condition of release. Most often this is retirement on or after preservation age, ceasing employment after age 60, or simply reaching age 65. The member then asks their super fund to commence an account-based pension using all or part of their accumulation balance.

The fund opens a separate pension account, transfers the agreed amount from accumulation, and begins paying regular income to the member. Members typically choose the frequency of payments (such as monthly, quarterly or annually) and the amount, subject to the legislated minimum and any product-specific rules.

Each year, the fund recalculates the minimum payment based on the balance at 1 July and the member's age. The remaining balance continues to be invested in the member's chosen options. When the balance reaches zero, the pension stops, regardless of how long the member has lived.

Account-based pensions interact with the transfer balance cap, which limits the total amount that can be transferred to retirement-phase income streams across all of a member's super accounts. Amounts above the cap must remain in accumulation or be paid as a lump sum.

Who commonly uses account-based pensions?

Account-based pensions are commonly used by:

  • Retirees who want to draw regular income from their super
  • Members aged 65 or over who have decided to stop work or reduce hours
  • Members who want to keep their super invested while receiving income
  • Retirees who want flexibility to vary their drawdown amount over time
  • Members combining their pension income with Age Pension entitlements
  • Retirees who want tax-efficient income payments after age 60

Account-based pensions are typically used in combination with other retirement income sources, such as the Age Pension, annuities, private investments and home Equity, depending on individual circumstances.

Key features

  • Income stream paid from a member's superannuation balance
  • Balance remains invested in chosen options
  • Legislated minimum drawdown percentages based on age, with no maximum on most products
  • Earnings on Assets supporting the pension are generally tax-free up to the transfer balance cap
  • Payments to members aged 60 or over are usually tax-free
  • Ability to take additional lump sum withdrawals in most cases
  • Reversionary or beneficiary options for income to continue or be paid to dependants on death

Potential benefits

Account-based pensions can offer several potential benefits, although outcomes depend on individual circumstances and market performance.

Tax efficiency is a significant feature. Investment earnings on assets supporting the pension are generally exempt from tax up to the transfer balance cap, and payments to members aged 60 or over are typically tax-free. This can support a higher after-tax income compared with equivalent investments outside super.

Flexibility is another key benefit. Members can choose the frequency and amount of payments (within the minimum), make additional lump sum withdrawals, and adjust their investment options over time.

Continued investment exposure allows the remaining balance to potentially grow, particularly in early retirement when the time horizon may still be long.

Key risks and limitations

Account-based pensions do not guarantee income for life. Members should understand the risks involved.

  • Investment risk: returns can be negative, particularly in market downturns
  • Longevity risk: members may outlive their balance, especially if drawdowns are high or returns are low
  • Sequence-of-returns risk: poor returns in early retirement can substantially reduce sustainable income
  • Inflation can erode purchasing power over a long retirement
  • Changes in legislation or transfer balance cap rules can affect strategy
  • Past performance is not a reliable indicator of future returns

Tax, superannuation or regulatory considerations

Account-based pensions sit in the retirement phase of super, where investment earnings are generally tax-free up to the transfer balance cap. The transfer balance cap is a lifetime limit on the amount of super that can be moved into retirement-phase income streams; the cap is indexed and amounts above it must remain in accumulation.

Payments to members aged 60 or over are generally tax-free. For members aged between preservation age and 59, the taxable component of pension payments is included in assessable income but may attract a 15 per cent tax offset, depending on circumstances.

Minimum drawdown percentages increase with age. Failing to meet the minimum can affect the pension's tax-free status. Most account-based pensions allow members to take additional lump sums, sometimes called partial commutations, subject to product rules and transfer balance cap reporting.

How it fits into Retirement Planning

Account-based pensions often form the backbone of retirement income strategies for Australians with meaningful super balances. They provide regular, tax-effective income while keeping the balance invested for potential Long-term Growth.

Many retirees combine account-based pensions with other income sources to manage different risks. The Age Pension can provide a baseline indexed income, while annuities or lifetime pension products can address longevity risk. Account-based pensions add flexibility and exposure to investment markets.

Reviewing the drawdown strategy each year is important. Factors such as investment performance, changes in expenses, health, and Age Pension means testing all influence what level of drawdown is sustainable over time.

Common mistakes to avoid

  • Drawing income aggressively in poor market years without reviewing sustainability
  • Ignoring the impact of inflation on long-term purchasing power
  • Failing to consider sequence-of-returns risk early in retirement
  • Overlooking the transfer balance cap when commencing or restructuring pensions
  • Not updating beneficiary or reversionary pension arrangements after life changes
  • Holding all super in highly concentrated investments without Diversification

Questions to ask before using this instrument

  • How does my account-based pension fit with my Age Pension entitlement and other income sources?
  • What investment strategy is appropriate for my time horizon and Risk tolerance?
  • How will I manage sequence-of-returns risk in the early years of retirement?
  • What rules apply to taking additional lump sums or restructuring my pension?
  • What reversionary or beneficiary options should I consider?
  • Have I planned for how my pension interacts with the transfer balance cap?