With all it’s tax benefits, superannuation is a very attractive structure to build assets for your retirement. But how do you use the wealth you’ve accumulated in super to build a retirement income stream? That’s where an account-based pension comes in!
Even more tax-effective than a superannuation accumulation account is an account-based pension. In fact, it is a completely legal, tax-free haven, right here in Australia, available for everyone to use. The trick is to use it effectively.
In this article I will explain to you exactly how it works and give you some tips to maximise the benefit in the lead up to retirement.
What is an Account-Based Pension?
An account-based pension is the retirement phase of superannuation. It is a pension account that holds assets to produce an income stream for your retirement.
As the owner of the account, you have flexibility over what assets your pension is invested in. You also have flexibility over how much income you draw down from the account (more on this later) and the frequency of the repayments.
The idea is that when you decide to retire, turning off your earned income, an account-based pension can be a replacement source of income to meet your living expenses.
How long will the money last?
That depends on a few key factors: the starting balance, how your investments perform, how much you withdraw each year, and if you take any lump sum payments. There’s no lifetime guarantee, but the tax advantages can make your money go further than non-super savings.
How do pension payments work?
The government sets a minimum amount you must withdraw each year based on your age. The older you are, the higher the percentage you must take out—starting at 4% for those under 65.
The table below summarises the pension minimum applicable to each age group in the current 2024/25 financial year:
| Age | Standard Min % |
| Under 65 | 4% |
| 65 – 74 | 5% |
| 75 – 79 | 6% |
| 80 – 84 | 7% |
| 85 – 89 | 9% |
| 90 – 94 | 11% |
| 95 or more | 14% |
If you start part-way through the financial year, you only need to withdraw a proportionate amount. There’s also no maximum cap unless you’re in a Transition to Retirement (TTR) pension, which limits you to 10% of your account balance each year.
Tax advantages
One of the biggest perks of an account-based pension is the tax treatment. If you’re 60 or older, any income you withdraw is completely tax-free— it is classified as non-assessable, non-exempt income and therefore there is no need to report it on your tax return.
And it’s not just about income payments. Investment earnings within the account—whether from dividends or capital gains—are also tax-free. That means more of your money stays working for you, instead of getting eaten up by taxes.
If you are investing in Australian shares which provide a franked dividend, the franking credits are 100% rebated back into your account because of the tax-free status. This adds to extra income to help fund your retirement.
If you’re using a TTR pension, it’s a bit different: your investment earnings are taxed at up to 15%, similar to an accumulation account. But once you’ve fully retired, it’s back to tax-free heaven.
Eligibility criteria
In order to commence an account-based pension, you must meet the eligibility criteria. This depends on your preservation age and working status.
Your preservation age is the age at which you can start accessing your super. If you were born after 1 July 1964, your preservation age is 60.
The amount of superannuation you can access will depend on your working status. This is summarised below:
- Between ages 60 to 65 and still working, you will have partial access to superannuation through a TTR pension. The maximum you can draw down is 10%.
- Between ages 60 to 65 and not working, you will have full access to superannuation and an account-based pension.
- Above 65, full access to superannuation and an account-based pension regardless of your working status.
Start preparing now to maximise your Account-Based Pension
Even if you do not currently meet the eligibility criteria to commence and account-based pension, you should be planning for it. This includes utilising contribution cap limits to maximise the amount you have inside superannuation for an account-based pension and ensuring you are in an appropriate superannuation fund.
When it comes to choosing a super fund, you should choose a fund which offers a seamless asset transfer. This means you can transition the assets you hold in accumulation phase, into pension phase without triggering a capital gains tax (CGT) event.
The benefit of a seamless asset transfer is that it allows you to accumulate significant capital gains on invested assets throughout your working life and pay $0 tax on them by selling them down in pension phase – very powerful!
The next best thing is a retirement bonus when in a pooled superannuation arrangement. This is a lump sum payment to account for some of the tax saving when moving into an account-based pension. Retirement bonuses are applicable to pooled superannuation arrangements (like industry super funds) but only a handful of funds offer the benefit.
Watch the Transfer Balance Cap
There is a limit to how much you can put into a retirement phase pension—this is called the Transfer Balance Cap (TBC), currently set at $1.9 million. Any amount above that has to stay in the accumulation phase, where investment earnings are taxed at 15%.
If you’ve already started a pension before 1 July 2024, your TBC might be between $1.6 million and $1.9 million, depending on your individual circumstances.
The Guided Investor approach
An account-based pension is a fantastic way to get the most out of your super during retirement. It offers flexibility, attractive tax treatment, and the ability to tailor your income to your needs.
We start preparing our clients for the effective use of an account-based pension from Phase 1, by looking for an appropriate platform to house their super. We then deploy strategies through Phases 2 and 3 of wealth creation to maximise the benefits, before kicking off an account-based pension in Phase 4.
If you are not using your superannuation wisely, I can almost guarantee that you are paying too much in tax!
