By Philippa Billings, Chief Advice Officer, Otivo
There's a step at the end of the retirement transition that surprises a lot of people: the balance doesn't do anything on its own. Meeting a condition of release makes super accessible, but an accumulation account sits there paying nothing, still taxed on its earnings, until somebody converts it. That conversion is what produces the fortnightly payment that replaces a salary — and it's also the moment the $2.1 million transfer balance cap starts to matter. Here's how the conversion works.
Quick answer
A super balance is converted to income by starting a retirement phase income stream, most commonly an account-based pension. As at August 2026, earnings on the supporting assets become tax exempt, payments of the taxed element are tax-free from 60, minimum annual drawdowns apply from 4%, and the value counts towards the $2.1 million transfer balance cap.
What is an account-based pension?
An account-based pension is a super account that pays regular income from an invested balance, drawn down over time until the balance is exhausted.
It's the most common retirement income structure in Australia, and its defining feature is that it isn't a guaranteed income for life. The balance stays invested, the payments come out of it, and how long it lasts depends on the amount, the drawdown rate and investment returns. That's a genuine trade-off rather than a flaw — it retains flexibility and access to capital, at the cost of certainty.
Three things happen when accumulation converts to a retirement phase income stream.
- Earnings on the assets supporting the pension become tax exempt rather than taxed at up to 15%.
- Payments of the taxed element are tax-free from age 60 and aren't included in assessable income.
- The value of the pension at commencement is credited to the transfer balance account, against the general transfer balance cap of $2.1 million for 2026–27.
How much has to be drawn each year?
A minimum applies, set by regulation and stepping up with age. There's no maximum on an account-based pension in retirement phase.
- Under 65: 4%
- 65 to 74: 5%
- 75 to 79: 6%
- 80 to 84: 7%
- 85 to 89: 9%
- 90 to 94: 11%
- 95 or more: 14%
The percentage applies to the account balance at 1 July, or at the commencement balance in the first year, and it's recalculated each 1 July. A 68-year-old with $520,000 at 1 July has a minimum of $26,000 for the year. Where a pension commences part-way through a year the minimum is pro-rated for the days remaining, and where it commences on or after 1 June no minimum applies for that year.
These are the standard factors. Governments have temporarily reduced them during periods of major economic disruption, so any figure quoted from earlier commentary is worth checking against the current ATO position.
Why is there a minimum at all?
Because super's tax concessions exist to fund retirement income, not to shelter wealth indefinitely.
The minimum payment requirement is what keeps a retirement phase pension serving its purpose under the sole purpose test. Where the minimum isn't paid in a year, the income stream can lose its tax-exempt treatment for that year — a costly outcome, and the reason large funds generally administer the payment automatically rather than leaving it to members.
The practical read is that the minimum is a floor imposed by the rules, not a recommended drawdown rate. Whether drawing more than the minimum makes sense is a separate question that depends on spending, other income and how many years need funding.
What are the alternatives to an account-based pension?
Three other routes exist, and they're often combined rather than chosen exclusively.
Leaving the balance in accumulation. Legitimate, but earnings continue to be taxed at up to 15% and no income is produced. Sometimes used where other income covers spending in the short term.
Taking lump sums. Available once a condition of release with no cashing restrictions has been met. Payments of the taxed element are tax-free from 60. Lump sums don't count towards minimum drawdown requirements, and taking a large one has consequences for how long the balance lasts.
Guaranteed or lifetime income products. A category of income streams designed to pay for life rather than until a balance runs out, trading flexibility and access to capital for longevity certainty. Products in this category differ substantially in structure and terms, so the relevant comparison is between the features that matter to a particular situation rather than a general ranking.
Many retirement income arrangements use a combination — an account-based pension for flexibility alongside another source for baseline certainty.
What decisions come with setting it up?
Four, and the fund's application form will ask for all of them.
- How much to convert. The whole balance or part of it, bearing in mind the $2.1 million transfer balance cap and that amounts left in accumulation keep being taxed on earnings.
- The payment amount and frequency. Anything at or above the minimum, paid monthly, quarterly, half-yearly or annually depending on the fund's options.
- How the balance is invested. A shorter timeframe and an active drawdown change the considerations compared with accumulation, and option choice is one of the levers that affects long-term outcomes.
- Beneficiary nominations. Funds provide forms for binding and reversionary nominations, and a reversionary nomination affects whether payments continue to a surviving partner.
The transfer balance cap point deserves emphasis. The credit is struck on the value at commencement, so the timing of the conversion matters for anyone with a large balance.
Frequently asked questions
Is income from an account-based pension taxed?
Payments of the taxed element are tax-free from age 60 and aren't included in assessable income. An untaxed element, which arises in some public sector schemes, is included and attracts a tax offset.
How long will an account-based pension last?
It depends on the balance, the drawdown rate and investment returns, since it pays until the balance is exhausted rather than for life. Drawing at the minimum extends it; drawing more shortens it.
Can you take a lump sum from an account-based pension?
Generally yes, once the pension is in retirement phase, since the commutation restrictions that apply to a transition to retirement pension don't apply. Lump sums don't count towards the minimum annual payment.
What happens if your balance exceeds the transfer balance cap?
The excess is subject to the ATO's excess transfer balance rules, which generally require it to be commuted out of retirement phase and apply an excess transfer balance tax. Amounts above the cap can remain in accumulation.
Where this leaves you
Converting super to income is the step that makes the whole transition real, and it carries three decisions with lasting effects — how much to convert, how much to draw, and how the remainder is invested. The minimum drawdown is a legal floor, not a plan. Otivo, a digital financial advice platform licensed under AFSL and Australian Credit Licence No. 485665, has a retirement planning module that models balance, spending, other investments and Age Pension eligibility across the years ahead, and a super investment options module for the investment side.
Sources
- ATO, Key super rates and thresholds — minimum annual payments. ato.gov.au
- ATO, Retirement withdrawal — lump sum or income stream. ato.gov.au
- ATO, Contributions caps. ato.gov.au
Disclaimer
The information in this communication is current as at August 2026 and has been prepared by Otivo Pty Ltd ABN 47 602 457 732, AFSL and Australian Credit Licence No. 485665. This content is general information only and has been prepared without taking into account your objectives, financial situation or needs. It is not personal financial or taxation advice and should not be relied on as such. Before acting on any information, you should consider its appropriateness having regard to your personal circumstances. This material must not be reproduced in whole or in part, or posted on any social media platform, without the prior written consent of Otivo Pty Ltd.