Transferring your account-based pension to a different fund: what actually happens, and the costs that often go unmentioned

For Australians already in pension phase — drawing income from an account-based pension at one fund — there are sometimes good reasons to consider moving the balance to a different fund. Persistently underwhelming investment performance, materially higher fees than competitors, dissatisfaction with member service, or a desire to consolidate multiple accounts can all motivate the question: should I switch funds in retirement?

The decision is usually weighed on long-run grounds — fees, returns, service, fit. But the mechanics of effecting the switch are more layered than members typically appreciate, and several of the costs are not in the brochure. Understanding them before initiating the transfer is the difference between a clean switch and an expensive one.

What are the three events in a fund transfer?

An account-based pension is not "moved" between funds in a single step. The technical sequence is three events:

1. The existing pension is commuted (closed) — TBA debit at the old fund equal to the value at commutation
2. The resulting lump sum is rolled over to the new fund as accumulation balance
3. A new account-based pension is commenced at the new fund — TBA credit at the new commencement value

Each event has Transfer Balance Account (TBA) implications. The TBC for 2025-26 is $2.0 million per person (see the dedicated transfer-balance-cap article for full mechanics). In a clean inter-fund transfer, the commutation debit and the new-pension credit typically offset — but they offset at different valuations if there's any time lag, and TBA arithmetic is unforgiving for retirees close to their personal cap.

The complication: if the original pension was commenced years ago when the TBC was lower ($1.6 million in 2017-18) and has since grown substantially through investment returns, the original credit at commencement was a smaller number. The commutation debit now is a larger number. The credit at the new fund is also a larger number. The math still works in most cases, but it requires care, particularly for retirees with balances close to the current TBC.

What is the grandfathering risk — often the largest hidden cost?

The single biggest hidden cost for some retirees: rolling over a pre-2015 grandfathered account-based pension ends grandfathering forever.

Two grandfathering frameworks are at risk:

• Age Pension grandfathering (DSS Guide 3.9.3.31): pre-1 January 2015 ABPs held by income support recipients are assessed under the older "deductible amount" method rather than deeming. Often produces materially lower assessed income for Age Pension means-test purposes.
• CSHC grandfathering: pre-1 January 2015 ABPs held by continuous CSHC holders since before that date are fully exempt from the CSHC income test (see related commonwealth-seniors-health-card article).

Rolling over to a new fund commences a new pension. The new pension is post-2015 and does not qualify for either grandfathering. Both protections are lost permanently. Depending on the balance, this can reduce Age Pension entitlement by hundreds or thousands of dollars per year — every year, for the rest of the retiree's life — or end CSHC eligibility.

For pre-2015 grandfathered holders, this single consideration often dominates the fee savings of switching funds entirely. Always model the post-rollover Age Pension and/or CSHC position before commuting any grandfathered pension.

Why must the reversionary nomination be re-established at the new fund?

If the existing pension has a reversionary nomination — typically the spouse, named to receive automatic continuation of the pension on the member's death — the nomination is a feature of that specific pension. When the pension is commuted, the reversionary nomination ends with it.

The new pension at the new fund must have its reversionary nomination established afresh as part of the new pension commencement. This is sometimes overlooked in transfer paperwork. A member who relied on the existing reversionary nomination may emerge from the transfer with no reversionary nomination at all — exposing their spouse to a death benefit lump sum scenario at the next death event rather than the continuing pension originally intended. Worth checking explicitly in any transfer.

How does the proportioning rule affect a fund transfer?

Every account-based pension has a proportion of tax-free and taxable components, fixed at commencement. Under the proportioning rule (ATO, https://www.ato.gov.au/tax-and-super-professionals/for-superannuation-professionals/apra-regulated-funds/managing-member-benefits/managing-and-calculating-member-benefits/calculating-components-of-a-super-benefit; DBA Lawyers, https://www.dbalawyers.com.au/audit/the-proportioning-rule-and-the-payment-of-super-benefits/), when a benefit is rolled over the lump sum carries the same component proportion as the source interest, and the new pension takes on the same proportion. This is fine as far as it goes.

The risk arises when the rollover lands in an accumulation account at the new fund alongside other balances before the new pension is commenced. The components are then averaged across the combined balance — which can dilute the tax-free component if the other balances are predominantly taxable. For retirees who have been managing their component proportion through recontribution strategies (typically to lift the tax-free proportion ahead of estate planning for non-tax-dependant beneficiaries), this dilution undoes years of careful work.

Structure the transfer to avoid component dilution: ideally, commence the new pension immediately from the rollover amount alone, before any other balances are mixed at the new fund. Where the new fund's process forces a brief commingling, model the resulting averaged proportion and decide whether the dilution is acceptable.

What happens to your insurance when you switch super funds?

Life, TPD, or income protection cover held inside the existing fund is generally not transferred when the balance moves. Critically, rolling over your entire balance closes your old account, which terminates the insurance attached to it (APRA, https://www.apra.gov.au/protecting-your-super-package-frequently-asked-questions).

For retirees in their 60s — particularly those with health conditions that have arisen since the original cover was put in place — replacing this insurance at the new fund or independently may be expensive or impossible. New cover requires fresh underwriting, and pre-existing condition exclusions or outright rejection are common.

For some retirees, this is the single most important consideration: the existing insurance may be irreplaceable, and switching funds means losing it. Before initiating any transfer, get explicit written confirmation from BOTH funds about the post-transfer insurance position, and only proceed if any replacement cover at the new fund (or held externally) is in place and effective FIRST.

What are the Centrelink notification requirements after a fund transfer?

The transfer must be reported to Services Australia within the standard 14-day notification window that applies to any change in financial circumstances for an Age Pensioner. Failure to notify can produce overpayments or underpayments. The commutation and recommencement also affects how the new pension is assessed (deeming applies from commencement of the new pension if the original was grandfathered), so the notification timing matters.

Case study: the obvious-looking fund switch that is actually a mistake

Consider Margaret, 76, single, holds a grandfathered pre-2015 ABP with $850,000 balance at Fund A. She receives a small part Age Pension. Fund A's fees are 0.85% MER; Fund B's are 0.45%. Surface fee saving: ~$3,400/year.

The grandfathering analysis: Margaret's grandfathered pension is assessed under the deductible-amount method. Her assessed income from the pension is currently around $18,000/year (deductible amount calculation). If she rolls to Fund B, the new pension is deemed: $64,200 × 1.25% + ($850,000 − $64,200) × 3.25% = ~$26,400/year. Difference of $8,400/year added to her income test.

Pension impact: under the income test taper (50%), her Age Pension would reduce by ~$4,200/year. Net cost of the rollover: $4,200 - $3,400 = $800/year LOSS — and that's just the first year. The grandfathering loss is permanent; the fee saving is rate-dependent.

Recommendation: don't switch. Or, if Fund A's investment performance is genuinely poor, model retention with active option-changes within Fund A first.

Case study: the fund transfer where insurance is the trap

Consider David, 64, has $480k in a pension at Fund X plus $1.5M default life cover and $1.2M TPD cover within the same fund. He's been on the cover for 25 years; medical history now includes managed type-2 diabetes and a 2023 stent procedure. Fund Y offers slightly better investment options and lower fees.

Default insurance underwriting at Fund Y: post-medical-history applications are typically loaded or excluded. Fund Y quotes him: TPD declined, life cover at +50% premium loading, no stent-related cover. Effectively a meaningful cover reduction.

The rational sequence if David still wants to switch: (1) first apply for replacement cover at Fund Y or independently, get the underwriting result, decide if the replacement is acceptable, only then initiate the rollover. Many retirees have lost meaningful insurance cover by transferring the balance first and discovering the gap afterwards. The insurance test is "what cover will I actually have AFTER the transfer is complete" — answer that before the transfer button is pressed.

How should retirees approach the fund transfer decision?

For a retiree considering a fund switch in pension phase, a properly structured analysis covers six considerations: TBA arithmetic, grandfathering position, reversionary nomination, component proportion, insurance retention, and Centrelink notification. The fee and performance comparison sits on top of that, not in place of it.

In some cases the analysis confirms switching is materially better. In others, the costs of switching dominate the gains. The point of running the analysis is to know which case applies before initiating the transfer — not to discover the costs afterwards.

For pension-phase retirees, this is exactly the kind of decision where an adviser-led process is materially valuable. The analysis is not difficult, but it is multi-layered, and the specific numbers matter.

Sources

• Australian Taxation Office (ATO) — Calculating components of a super benefit
• dbalawyers.com.au — The proportioning rule and the payment of super benefits
• APRA — Protecting your super package frequently asked questions
• DSS Social Security Guide