An account-based pension (ABP) converts super into tax-free retirement income from age 60, with mandatory minimum drawdowns — 5% at ages 65-74, rising to 14% at 95-plus. The tax-free retirement phase is capped at $2 million per person (Transfer Balance Cap). ABP balances are subject to Centrelink deeming for the Age Pension income test.
For most Australians, superannuation doesn't stop working at retirement. It shifts roles: from accumulating savings during your working years to generating income during them. The vehicle for that shift is called an account-based pension (ABP), and understanding how it works — its tax advantages, its rules, and its risks — is one of the most practically valuable things a retiree can know.
What is an account-based pension?
An account-based pension is a retirement income product that converts your superannuation accumulation balance into a regular income stream. The balance remains invested in your chosen fund option, and regular payments are drawn from it over time. Unlike a term deposit or an annuity, an ABP doesn't provide a fixed payment or a guaranteed income for life — it is a drawdown product, which means your income continues only as long as the balance does. The balance can grow with investment returns or fall with market movements, and pension payments reduce it further each year.
How are account-based pension payments taxed from age 60?
For members aged 60 and over, account-based pension payments are tax-free — as are the investment earnings inside the fund once it is in the retirement phase (ATO, https://www.ato.gov.au/tax-rates-and-codes/key-superannuation-rates-and-thresholds/payments-from-super). This contrasts with the accumulation phase, where fund earnings are taxed at 15%.
A worked illustration: a $700,000 balance earning 5 per cent per year generates $35,000 in investment returns. In accumulation, that incurs $5,250 in tax. In pension phase, it incurs none. That saving compounds meaningfully over a long retirement. For couples who have both reached retirement age, converting both super balances to ABPs can represent substantial tax savings over a decade or more — typically tens of thousands of dollars in cumulative tax avoided across a 20-year retirement, depending on balance and returns.
What are the minimum pension drawdown rates?
Government rules require that a minimum percentage of your ABP balance be withdrawn each financial year. The percentages increase with age. The standard rates are set out in Schedule 7 of the Superannuation Industry (Supervision) Regulations 1994 (https://classic.austlii.edu.au/au/legis/cth/consol_reg/sir1994582/sch7.html):
| Age (on 1 July of FY) | Minimum drawdown |
|---|---|
| Under 65 | 4% |
| 65–74 | 5% |
| 75–79 | 6% |
| 80–84 | 7% |
| 85–89 | 9% |
| 90–94 | 11% |
| 95+ | 14% |
The percentage is applied to the ABP balance at 1 July each year (or commencement balance in the year of commencement) to determine the minimum annual payment.
Important: the COVID-era halving has ended. From 1 July 2019 to 30 June 2023, the federal government halved these rates in response to pandemic market volatility. From 1 July 2023, standard rates apply again (Treasury / ASFA confirmed; https://www.superguide.com.au/in-retirement/minimum-pension-payments-reduced). Anyone who relied on halved-rate planning during the pandemic must now draw the standard minimum — for many retirees this means doubling the prior year's drawdown overnight.
There is no maximum on ABP drawdowns — you can take as much as you like, including lump sums. If you do not take at least the minimum in a given year, the account loses its tax-free pension phase status for that year — fund earnings revert to 15% tax for the entire year, retroactively. Hitting the minimum is therefore non-negotiable.
What is the Transfer Balance Cap and how does it limit the tax-free retirement phase?
There is a limit on how much superannuation can be held in the tax-free retirement phase: the Transfer Balance Cap (TBC), which applies per person. For FY2025-26 the general TBC is $2.0 million (ATO; corroborated by FirstTech/Colonial First State; see also the dedicated transfer-balance-cap article for full mechanics). Personal caps may differ from the general figure depending on when each member first commenced a retirement-phase pension.
If your super balance exceeds your personal TBC, the excess must remain in the accumulation phase and continues to be taxed at 15% on earnings. For most Australians in the $400,000 to $1.5 million range, the cap is unlikely to be binding. For couples with larger combined balances, it is worth understanding before commencing a pension.
How is an account-based pension assessed for the Age Pension?
For retirees who receive — or may one day receive — the Age Pension, an ABP balance counts in both the assets test and the income test. Under rules that came into effect on 1 January 2015, the income from a post-2015 ABP is assessed through the deeming system: Services Australia applies a standard notional rate to your ABP balance to calculate assessed income, rather than counting your actual pension payments.
The current deeming rates (effective 20 March 2026, per DSS Social Security Guide 4.4.1.10, https://guides.dss.gov.au/social-security-guide/4/4/1/10):
- Below threshold rate: 1.25% per annum
- Above threshold rate: 3.25% per annum
- Thresholds: $64,200 single / $106,200 pensioner couple combined / $53,100 non-pensioner couple member
Note these rates rose from the long-running 0.25%/2.25% pandemic-era freeze (which held from May 2020 to September 2025) following two upward adjustments — to 0.75%/2.75% on 20 September 2025 and to 1.25%/3.25% on 20 March 2026. Any planning built around the older lower deeming rates should be revisited.
What is the pre-2015 account-based pension grandfathering rule?
There is one significant exception to the deeming rules for ABPs. Account-based pensions held by income support recipients immediately before 1 January 2015 may be grandfathered and continue to be assessed under the older return-of-capital rules (deductible amount method) rather than deeming. To preserve grandfathering, the member must have been a continuous income support recipient since before 1 January 2015 AND the pension itself must have commenced before 1 January 2015. Rolling the pension over to a new fund — even within the same provider — generally breaks grandfathering. (See the dedicated commonwealth-seniors-health-card article for the parallel grandfathering rule for CSHC, where the treatment is full exemption rather than deductible-amount assessment.)
What is longevity risk and why does it matter for account-based pensions?
The most important risk to understand with an ABP is longevity risk — the risk of outliving your money. An account-based pension is a finite, depletable pool. As minimum drawdown rates increase with age and market returns fluctuate, a balance that looks comfortable at 65 may present very differently at 85.
For a couple where one or both partners are in good health at 65, there is a meaningful probability that at least one will still be alive well into their late eighties — current Australian life-expectancy data suggests roughly a 50% chance of one of a 65-year-old couple living past 92. Thinking about how long your balance might last under different drawdown rates and investment return assumptions is one of the most useful exercises in retirement planning, and one best done before the money runs low rather than after.
What does a typical account-based pension look like at retirement?
Consider Janet, 67, just retired from full-time work with $620,000 in super. She commences an account-based pension. As a 65-74-year-old, her minimum drawdown is 5%. Year 1 minimum: 5% × $620,000 = $31,000. She elects to draw monthly ($2,583/month). Her fund stays invested in a balanced option earning say 6.5% net per year on average.
Her Age Pension position: she is single and home-owning. Other assets: $40,000 cash, no investment property. Total assessable assets: $620,000 (the ABP) + $40,000 = $660,000. As a single homeowner the full-pension assets-test threshold is $321,500 and the cut-off is around $722,000 (FY2025-26 from 20 March 2026). At $660,000 she's in the taper zone but still receives a part-pension.
Pension reduction = ($660,000 − $321,500) × $3 ÷ $1,000 = $1,015.50/fortnight. Maximum single pension is $1,200.90/fortnight, so Janet receives about $185.40/fortnight = ~$4,820/year of Age Pension.
She also has the income-test calculation. Deemed income on $660,000: $64,200 × 1.25% + ($660,000 − $64,200) × 3.25% = $803 + $19,364 = $20,167/year = $776/fortnight. Income free area for single = $218/fortnight. Excess = $558/fortnight. Pension reduction under income test = 50% × $558 = $279/fortnight. Income-test pension paid = $1,200.90 − $279 = $922/fortnight.
Janet receives the LOWER of the two test outcomes = $185.40/fortnight (assets test binds). She draws $31,000 from her ABP plus receives ~$4,820 in Age Pension. Total income: ~$35,820/year for the first year.
Each year her ABP balance changes (drawdowns + market returns), her age increases (drawdown rate may rise at 75 to 6%), and her assessable assets adjust. Modelling these out for 25 years is the exercise that determines whether $620,000 is enough.
What happens when you roll over a pre-2015 grandfathered account-based pension?
Consider Robert, 78, single, holds a CSHC since 2014, has a grandfathered ABP balance of $980,000 commenced in 2013. The grandfathering means his ABP is fully exempt from the CSHC income test (a different treatment from Age Pension grandfathering, which uses the deductible-amount method).
His fund manager proposes a rollover to a different fund — fee saving of $3,500/year. Rolling over breaks the grandfathering forever. New ABP would be deemed: $64,200 × 1.25% + ($980,000 − $64,200) × 3.25% = $803 + $29,764 = ~$30,567/year added to his ATI for CSHC purposes.
His other ATI (investment income) is $52,000/year. Pre-rollover ATI: $52,000 (grandfathered ABP excluded). Post-rollover ATI: $52,000 + $30,567 = $82,567 — still under the $101,105 single CSHC limit, so the card survives. But he has burned the buffer for any future income increase, and the $3,500 fee saving is roughly cancelled by the loss of pricing flexibility on his portfolio. Almost always, preserving grandfathering is worth more than the headline fee saving. Always model the CSHC and Age Pension impact before commuting any pre-2015 pension.
What should you check if you hold an account-based pension?
If you have not yet converted your superannuation to an account-based pension, it is worth considering whether fund earnings are still being taxed at 15% that need not be — once age 60+ and retired, the tax-free zone is available.
If you are already drawing from an ABP, check:
- Your minimum drawdown requirement for the current year (using your 1 July balance and age-band rate)
- Whether the assets test or income test is currently binding on your Age Pension entitlement (if relevant)
- A rough sense of how long your balance might last at current drawdown rates and realistic return assumptions
None of these require a complex calculation — but each benefits from a conversation with a licensed financial adviser who can model your specific numbers.
Sources
- DSS Social Security Guide
- DSS Social Security Guide
- classic.austlii.edu.au — Sch7
- Australian Taxation Office (ATO) — Income stream pension rules and payments
- Australian Taxation Office (ATO) — Payments from super
- superguide.com.au — Minimum pension payments reduced
Key takeaways
- An account-based pension (ABP) converts your superannuation balance into a retirement income stream. Payments and fund earnings are completely tax-free from age 60 — the primary tax advantage of converting to an ABP at retirement. Unlike annuities, an ABP is a drawdown product: it pays only as long as the balance lasts.
- Mandatory minimum drawdown rates apply to ABPs — 4% before age 65, 5% at ages 65-74, rising to 14% at 95-plus. The COVID-era halving of these rates ended on 1 July 2023; the full standard rates now apply. Failing to draw the minimum in any year causes the fund to lose pension-phase status retroactively for that year, reverting to 15% earnings tax.
- For the Age Pension, an ABP balance counts in both the assets test and the income test. Income is assessed through deeming — Services Australia applies a notional rate (1.25% below threshold, 3.25% above) to the ABP balance, regardless of actual drawings. Deeming rates were raised in September 2025 and March 2026 from the pandemic-era freeze; any planning based on the old rates needs revisiting.
- The tax-free retirement phase is capped at $2.0 million per person in 2025-26 (Transfer Balance Cap). Super above this cap must stay in accumulation phase, taxed at 15% on earnings. Personal caps can be lower than the general cap depending on when you first commenced a pension.
- Account-based pensions commenced before 1 January 2015 by continuous income support recipients may be grandfathered under pre-deeming rules. Grandfathering is permanently lost if the pension is rolled over to a new fund. Always model the Centrelink impact before any fund switch or rollover of a pre-2015 pension.
Frequently asked questions
What is an account-based pension and how does it work?
An account-based pension (ABP) converts your superannuation accumulation balance into a regular income stream during retirement. The balance stays invested in your chosen fund option, and regular payments are drawn from it over time. Unlike an annuity, an ABP is a drawdown product — it pays income only for as long as the balance lasts, and the balance can grow or fall with investment returns. Payments and fund earnings are completely tax-free for members aged 60 and over.
What minimum pension drawdown applies to my account-based pension?
The minimum drawdown rate depends on your age on 1 July — 4% under 65, 5% at 65-74, 6% at 75-79, rising to 14% at 95-plus. These rates apply to your account balance on 1 July each year. The COVID-era halving of these rates ended on 30 June 2023; the full standard rates have applied since 1 July 2023. Failing to take at least the minimum in any year causes the fund to lose pension-phase status for that entire year, meaning fund earnings revert to 15% tax retroactively.
How does Centrelink assess an account-based pension for the Age Pension?
ABPs count in both the Age Pension assets test (at full balance) and the income test (via deeming). Under deeming, Services Australia applies a notional rate — currently 1.25% per annum on the first $64,200, and 3.25% on the remainder — to the ABP balance to calculate assessed income, regardless of what you actually draw. Deeming rates rose from their pandemic-era freeze in two steps in late 2025 and early 2026; any planning built around the old 0.25%/2.25% rates needs revisiting.
What is the pre-2015 ABP grandfathering and can I lose it?
Account-based pensions commenced before 1 January 2015 by a person who was also continuously receiving income support from before that date are grandfathered — assessed under the old return-of-capital (deductible amount) method rather than deeming. For CSHC holders, the grandfathered ABP is fully exempt from the income test. Grandfathering is permanently and irrecoverably lost if the pension is rolled over to a different fund, even within the same provider. Always model the full Centrelink impact before any fund consolidation or rollover of a pre-2015 pension.