The default sequencing rule — take the ABP minimum, then spend non-super before touching more of super — is often right, but has three exceptions. If your super will pass to adult children as a death benefit, they pay 17% tax on the taxable component, so drawing super first can save more for the estate. Sequence-of-returns risk can also override tax logic during a market downturn.
For an Australian retiree who has a balanced retirement balance sheet — an account-based pension, perhaps some superannuation in accumulation, some shares or managed funds held in personal name, a term deposit, and the family home — every year of retirement involves a quiet planning decision: which pot to draw from to fund this year's spending? The minimum drawdown from the account-based pension is compulsory. Above that, the question is open. And the dollar difference over a 15- to 20-year retirement, depending on which approach is taken, can run to tens of thousands.
The classical practitioner framework starts from a tax-efficiency premise. Money in superannuation pension phase grows tax-free on earnings — by far the most tax-favourable structure available to retirees. Money in superannuation accumulation grows at 15% earnings tax. Money in non-super investments grows at the retiree's marginal tax rate. So the textbook rule: take the compulsory minimum from the ABP, then top up from non-super investments, increase ABP drawdown if non-super is depleted, and only finally start drawing from super accumulation.
This rule is intuitive and often correct. But it has at least three significant exceptions, and missing them is a common practitioner error.
The first exception is death benefits tax. Superannuation paid out as a death benefit is taxed differently depending on who receives it. To a tax dependant — generally a spouse, a child under 18, or a person in an interdependency relationship — the taxable component of super is paid tax-free. To a non-tax dependant — typically an adult child — the taxable component attracts 15% plus the 2% Medicare levy, or 17%. For a retiree intending to leave super to adult children, every dollar of taxable component left in super at death produces 17 cents of tax. A $500,000 super balance, mostly taxable component, throws off roughly $85,000 of tax to the next generation.
For a retiree in this position, deliberately depleting super to fund retirement spending — and preserving non-super investments, which pass to beneficiaries with the asset's cost base intact — reverses the textbook rule. The retiree pays slightly more tax during life (because they hold less in the tax-free pension structure) but saves substantially more for the estate.
The second exception is the recontribution strategy. A retiree aged 60 or over can withdraw a lump sum from super tax-free, then recontribute it as a non-concessional contribution. Subject to contribution caps — the NCC cap is $120,000 in 2025-26, or $360,000 under the bring-forward rule — and the under-75 contribution age. The effect: a portion of the super balance, originally a mix of taxable and tax-free components, is recontributed entirely as a tax-free component. The balance shifts from taxable to tax-free, which reduces eventual death benefits tax for non-dependants.
Combined with sequencing, the recontribution strategy works elegantly. The retiree spends from non-super each year (preserving its cost base for heirs), withdraws-and-recontributes from super (converting taxable into tax-free), and emerges over five to ten years with a fundamentally different balance sheet — same total wealth, much lower exposure to death benefits tax, larger eventual estate value for adult children. The strategy requires careful coordination with annual contribution caps, TSB limits, and the age-cut-off.
The third exception is sequence-of-returns risk. Drawing from non-super investments during a market downturn locks in losses that holding through would have recovered. The behavioural and structural answer to this is the bucket strategy: hold a cash buffer (one to three years of spending) outside the volatile investment pot, draw from cash during downturns, and rebalance from growth assets in better times. This reorders the sequencing decision around volatility rather than pure tax efficiency.
The Age Pension means tests rarely change the sequencing answer in a clean way. Both super in pension phase and super in accumulation are assessable as financial assets and subject to deeming under the income test. Non-super investments are also assessable and deemed. The principal home is exempt. So drawing from super versus non-super does not move the means tests in different directions — both pots come out of the same financial-asset pool. The exception is when the retiree shifts assets into exempt structures (home renovation, downsizer recontribution-not-claimed, prepaid funeral or funeral bond up to the threshold). That is a different conversation, and when relevant, it dominates the super-versus-non-super sequencing question.
Worked example, simplified: a 67-year-old single homeowner with $500,000 in account-based pension, $200,000 in non-super shares (cost base $150,000), $100,000 in term deposit. Spending requirement of $50,000 per year above Age Pension entitlement. Minimum ABP drawdown at this age: 5%, or $25,000. After taking the minimum, $25,000 of additional spending must be sourced.
Approach A: take $25,000 from the term deposit. ABP grows tax-free at the underlying earnings rate. Term deposit balance reduces.
Approach B: take an additional $25,000 from the ABP — total $50,000 drawdown. ABP balance reduces faster. Term deposit preserved.
Over 20 years, Approach A produces a higher total balance — because more wealth is held in the tax-free pension structure. But Approach B produces a lower death benefits tax exposure if the residual super at death is paid to non-tax-dependants. The right answer depends on this retiree's beneficiary intentions. With no beneficiaries (or with charitable intentions), Approach A wins. With adult children as primary beneficiaries, Approach B may win — especially if combined with recontribution.
The sequencing question is rarely answered by a rule of thumb. It depends on the retiree's age, marginal tax position, beneficiary intentions, market conditions, the mix of taxable and tax-free components in super, and the embedded gains in non-super investments. For most retirees, the value of getting it right runs to tens of thousands of dollars over a 15-year retirement. It is exactly the kind of multi-variable planning question where modelling specific numbers — not assuming a default rule — pays for itself.
Key takeaways
- The default sequencing rule — take the ABP minimum, then draw from non-super before touching more super — is sound when beneficiaries are tax dependants, but is often reversed when adult children will inherit the super balance.
- Super paid to adult non-dependant children as a death benefit attracts 17% tax on the taxable component. Deliberately drawing down super during retirement — and leaving non-super investments with their cost base intact for the estate — can save the next generation tens of thousands.
- The recontribution strategy (withdraw tax-free from super aged 60+, recontribute as a non-concessional contribution) converts taxable component to tax-free, reducing eventual death benefits tax — but must be coordinated against NCC caps ($120,000 in 2025-26) and the age cutoff (under 75).
- Sequence-of-returns risk can override tax-efficiency sequencing: a cash buffer of one to three years of spending limits forced asset sales during downturns, regardless of which investment pot the cash comes from.
- The Age Pension means tests do not cleanly favour super over non-super — both are assessed as financial assets subject to deeming — so the sequencing decision hinges on tax and estate outcomes, not Centrelink.
Frequently asked questions
Should I draw from super or non-super investments first in retirement?
The standard starting position is to take only the compulsory minimum pension drawdown from your account-based pension (4% for members under 65, 5% from ages 65–74, rising with age), then draw additional spending from non-super cash and investments. This preserves more wealth in the tax-free super pension structure, where earnings are tax-free. However, if your super balance will ultimately pass to adult children (who pay 17% tax on the taxable component as a death benefit), drawing super down first — and preserving non-super assets with their cost base — can produce a better estate outcome. There is no universal rule: the right approach depends on your beneficiary intentions.
What is the death benefits tax on super paid to adult children?
Super paid as a death benefit to a non-tax-dependant — which typically includes adult independent children — is taxed at 15% plus the 2% Medicare levy, totalling 17%, on the taxable component of the benefit. Only tax dependants (such as a surviving spouse, children under 18, or a person in an interdependency relationship) receive the taxable component tax-free. For a retiree leaving a substantial super balance to adult children, each additional dollar of taxable component in super at death costs 17 cents. Strategic drawdown during retirement can reduce this exposure significantly.
What is the recontribution strategy?
A retiree aged 60 or over can withdraw a lump sum from superannuation entirely tax-free, then recontribute it as a non-concessional contribution. The recontributed amount is booked as a tax-free component in super. Over several years, this converts a balance with a high taxable component into one with a higher tax-free component, reducing the eventual death benefits tax paid by adult non-dependant beneficiaries. The strategy must be managed within the non-concessional contribution cap ($120,000 in 2025-26, or $360,000 under the bring-forward rule) and only applies to members under age 75.
What is sequence-of-returns risk and how does it affect withdrawal sequencing?
Sequence-of-returns risk is the risk that large investment losses early in retirement permanently damage a portfolio by forcing the sale of assets at depressed prices to fund spending. Selling shares during a downturn locks in losses that would otherwise have recovered. The bucket strategy addresses this by holding a one-to-three-year cash buffer outside the volatile investment account and drawing from cash during downturns — temporarily overriding the pure tax-efficiency sequencing rule to protect the investment base.
Does the Age Pension means test affect which pot to draw from first?
Not in a decisive way. Both super in pension phase and super in accumulation are assessed as financial assets and subject to deeming under the income test. Non-super investments are also assessed and deemed. The principal home is exempt from both tests. Drawing down super does not move the Centrelink needle differently from drawing down non-super — both reduce the same assessed financial asset pool. The main exception is when funds are redirected into exempt structures such as home renovations, a prepaid funeral, or a funeral bond, but that is a separate strategy from super-versus-non-super sequencing.