Allocated pensions vs account-based pensions: what older retirees on legacy products should know

Australian super pension products have been through two reform points that older retirees still feel decades later. The first was 1 July 2007, when the Better Super reforms swept away the old "allocated pension" architecture and the Reasonable Benefit Limit framework, introducing the modern account-based pension (ABP) most retirees commence today. The second was 1 January 2015, when the Centrelink income test treatment of ABPs flipped from the long-standing deductible-amount method to deeming for any pension commenced on or after that date. For retirees whose pensions started before 1 January 2015 — and especially before 1 July 2007 — the legacy product status often confers materially valuable grandfathering that a modern ABP simply does not have. The principal planning rule is to recognise the grandfathering and not disturb it without a deliberate analysis of what would be lost.

The 1 January 2015 grandfathering is the one that does the most financial work. Under the deductible amount method that applies to pre-2015 pensions, Centrelink calculates assessable income as the gross pension drawdown less a deductible amount equal to the original purchase price divided by the recipient's life expectancy at commencement. For a long-dated pension funded mostly from member contributions, the deductible can be a high proportion of the drawdown and the assessable income for the Age Pension income test can be very low — sometimes nil. The deeming approach that applies to pensions commenced from 1 January 2015 ignores actual drawdowns altogether: assessable income is simply the deemed return on the account balance, applying the FY25-26 rates of 1.25% on the first $64,200 of financial assets for a single recipient ($106,200 combined for a couple) and 3.25% on the balance from 20 March 2026 (DSS Social Security Guide 4.4.1.10 — Overview of deeming, https://guides.dss.gov.au/social-security-guide/4/4/1/10, accessed 6 May 2026; Services Australia — income test for pensions, https://www.servicesaustralia.gov.au/income-test-for-pensions, accessed 6 May 2026). For a pensioner on a substantial legacy pension with a high deductible, the difference in assessable income between deductible-amount and deeming can run into tens of thousands a year, which translates directly into a higher Age Pension entitlement under the income test (subject to the assets test, which still applies regardless of which income method is in play).

The same 1 January 2015 cut-off applies to the Commonwealth Seniors Health Card (CSHC) income test. Pre-2015 ABPs are exempt from the CSHC income test rather than deemed for that purpose, which can be the difference between qualifying for the card and being shut out — particularly for self-funded retirees whose adjusted taxable income plus deemed income from financial assets sits near the FY25-26 CSHC cut-offs of $101,105 single and $161,768 combined for a couple from 20 September 2025 (Services Australia — who can get CSHC, https://www.servicesaustralia.gov.au/who-can-get-commonwealth-seniors-health-card, accessed 6 May 2026). The 1 January 2015 rule is the same rule for both Age Pension and CSHC purposes — but they are separate concession frameworks, and confusing CSHC grandfathering with Age Pension grandfathering is a frequent source of error (the related article on articles/2026-05-04-commonwealth-seniors-health-card-grandfathering covers the CSHC angle in more detail).

The pre-2007 layer is older and rarer but worth knowing about for clients who have been retired more than two decades. The Better Super reforms commenced 1 July 2007 introduced the modern ABP and effectively retired the older allocated pension framework that had run alongside the now-obsolete Reasonable Benefit Limit regime. Variants from that era — term allocated pensions (TAPs) running on fixed terms, market-linked pensions, and lifetime pensions out of defined benefit funds — were largely closed to new business but typically continued in operation under their original terms. Some of those variants carry their own asset-test concessions (notably, many TAPs and market-linked pensions sit under the asset-test 50% concession framework, a separate provision from the Centrelink income-test grandfathering). For a retiree on one of those products, the legacy treatment is often a significant overlay on top of the 2015 grandfathering.

The single most consequential rule is that commuting and restarting forfeits the grandfathering. Any commutation back to accumulation followed by recommencement of a new pension counts as a 2026 commencement for these purposes — the new pension is treated as a post-2015 ABP, subject to deeming for both Age Pension and CSHC, and the deductible-amount method is gone for good. This is why legacy pensions cannot be casually rolled over to a different fund, consolidated with a partner's super, or restructured in pursuit of lower fees without an explicit analysis of what would be lost. For a substantial pension where the grandfathering is worth thousands of dollars a year in additional Age Pension, the present value of preserved grandfathering across a 15- to 25-year remaining life can dwarf any fee saving from a switch. The decision to retain or restart should be deliberate, with the math written down.

The 1 July 2017 introduction of the Transfer Balance Cap (TBC) at $1.6 million sits separately and applies to all pensions in operation on that date, grandfathered or not. The cap has been progressively indexed to $2.0 million for FY25-26 (ATO — transfer balance cap, https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/in-detail/transfer-balance-cap, accessed 6 May 2026). Members whose pension balance at 30 June 2017 exceeded the then $1.6 million cap had to commute the excess back to accumulation phase or accept excess transfer balance tax. Carefully done, that partial commutation could be effected without a full restart of the pension and so without forfeiting the income-test grandfathering — but the technicalities matter, and several pensioners caught up in the 2017 transition did inadvertently restart and lose the grandfathering at that point. For surviving pre-2017 grandfathered pensions today, ongoing TBC management (recontributions, excess events, partial commutations) needs to be done with the grandfathering preservation in mind.

A specific scenario worth flagging is the reversionary pension. Where the legacy pension is reversionary to a spouse and the original member dies, the surviving spouse continues the pension on its existing terms — including the grandfathered Centrelink and CSHC treatment — provided the survivor was continuously in receipt of an income-support payment or the CSHC at the relevant times under the grandfathering rules. A non-reversionary death benefit pension started after death does not carry through the grandfathering; the new pension to the survivor is a 2026 commencement and is subject to deeming. For couples with substantial pre-2015 pensions, ensuring reversionary nominations are in place — and that the surviving spouse's own income-support history will satisfy the continuity condition — is one of the more consequential estate-planning considerations attached to the legacy product.

What do worked strategy examples show?

These two cases show how the grandfathering math actually lands. Illustrative only — not personal advice — using FY25-26 figures.

Case 1 — Norma, 81, single homeowner, on a pre-2015 ABP since 2012. Norma's pension was commenced in 2012 with $620,000, funded entirely from her late husband's super she'd received as a death benefit. Her current balance is around $410,000 after 14 years of drawdowns. Her annual drawdown is approximately $26,000. Her deductible amount, based on the original purchase price divided by her life expectancy at commencement, is roughly $24,500 — which means her assessable income from the pension under the deductible-amount method is around $1,500 per year. Centrelink's deeming rules under the FY25-26 framework would, by contrast, deem her $410,000 balance at 1.25% on the first $64,200 ($803) and 3.25% on the remaining $345,800 ($11,238), producing roughly $12,000 of assessable income — about $10,500 a year more than the grandfathered method. Under the income test, the additional deemed income of $10,500 would reduce her Age Pension by roughly $5,250 per year (50¢ in the dollar above the $218/fortnight single income free area), assuming the income test were the binding constraint. On these facts, retention of the grandfathered pension is generally rational. The trap to avoid is consolidating into a single new ABP with a smaller fund "to simplify her affairs" — that consolidation would forfeit the grandfathering and the additional Age Pension income, and the present value of that loss across her remaining life expectancy would substantially exceed any administrative or fee benefit.

Case 2 — Robert and Helen, both 76, homeowner couple, Robert's pre-2015 ABP commenced 2009 from a TAP rollover. Robert's pension was commenced in 2009 with $880,000 from a rollover that included a term allocated pension component, with Helen as the reversionary beneficiary. His current balance is about $560,000. His drawdown is around $39,000 a year, deductible around $33,000, so assessable income for the Age Pension and CSHC tests is around $6,000 — well below what deeming would produce. They sit at the boundary of the part-pension and CSHC frameworks: the grandfathering is currently the difference between Helen retaining Age Pension entitlement and having to rely on CSHC alone if Robert pre-deceased her. On these facts, the rational planning sequence is to confirm the reversionary nomination is in place and current with the trustee, document Helen's continuous income-support history (she has been on Robert's partnered pension since 2017), and avoid any restructure of Robert's pension that would commute and recommence. If Robert's pension needs adjustment for cash-flow reasons, partial commutation back to accumulation (preserving the underlying pension) is generally safer than commuting and starting a new pension. The trap to avoid is a fund switch in pursuit of lower fees — a move from one provider to another commutes the source pension and starts a new one at the destination, forfeiting the grandfathering for both Age Pension and CSHC purposes for the rest of Robert's life and Helen's life thereafter.

For older retirees and the families who eventually manage their affairs, the legacy pension question is one to surface early. If the pension has been running for a decade or more, the grandfathering may apply, and the cost of identifying and preserving it is small. The cost of inadvertently forfeiting it — through a casual rollover, a fund consolidation, a non-reversionary death benefit start, or a poorly structured TBC commutation — is substantial and irreversible. Brief the family, document the grandfathered status, and before any restructure, write down what would be lost. Modern ABPs are administratively simpler, but for the right retiree on the right legacy product, simpler is not better.

Sources

• Australian Taxation Office (ATO) — Transfer balance cap
• Services Australia — Income test for pensions
• Services Australia — Who can get commonwealth seniors health card
• MoneySmart (ASIC) — Account based pensions
• DSS Social Security Guide