By Philippa Billings, Chief Advice Officer, Otivo
An account-based pension is the vehicle most Australians use to turn a super balance into a regular income, and yet plenty of people arrive at retirement having never heard the term. It isn't a product you buy off a shelf so much as a switch you flip on the super you already have. Here's what it is, how it pays you, and why the tax treatment makes it the common choice.
An account-based pension is an income stream you start with your super in retirement. Your balance stays invested and you draw a regular income from it, with the flexibility to adjust the amount above a set minimum. As at July 2026, earnings on the assets supporting it are generally tax-free, up to the general transfer balance cap, which is $2.1 million for the 2026-27 financial year.
How does an account-based pension work?
You start one by moving some or all of your super into a pension account once you've met a condition of release. The balance stays invested in options you choose, much as it was before, and you draw a regular income from it. Because it remains invested, the balance keeps earning returns, but it also falls as you draw on it, so how long it lasts depends on the balance between what you take out and what it earns. It's your money working as an income, rather than a fixed payment from someone else.
How is an account-based pension taxed?
The tax treatment is a large part of why it's the standard choice. Once your super is supporting an account-based pension, the investment earnings on those assets are generally tax-free, rather than taxed at up to 15% as they are in the accumulation phase.
That 15% is the general rate applying to investment earnings inside a super fund in accumulation. Other super taxes can apply depending on your circumstances. Concessional contributions are generally taxed at 15% in the fund, and where your income plus concessional contributions exceeds $250,000 in a financial year, Division 293 tax adds a further 15%, taking the effective rate on some or all of those contributions to 30%. All of these rates and thresholds are set by law and can change.
For most people aged 60 and over drawing from a taxed fund, the pension payments themselves are also tax-free. There's a limit on how much you can move into this tax-free retirement phase, the transfer balance cap. The general cap is $2.1 million for the 2026-27 financial year, having been indexed up from $2 million on 1 July 2026. Your personal cap can differ from the general cap if you've already started a retirement phase income stream, and the ATO tracks your personal cap through ATO online services in myGov.
How much do you have to withdraw?
There's a minimum, set by your age. For the 2026-27 financial year it starts at 4% of the balance a year for those under 65 and rises through the older age bands. These percentages are set by regulation and have been varied in the past, including temporary reductions, so it's worth checking the rates that apply for the financial year you're in. The minimum ensures the money is actually used for retirement income over time. Above that floor you generally have flexibility to draw more when you need it, which is one of the features that makes an account-based pension adaptable year to year.
What happens to the balance over time?
It depends on the tug of war between your withdrawals and your returns. In years when returns exceed what you draw, the balance can hold or even grow, and in weaker years it falls faster. Unlike a lifetime annuity, an account-based pension isn't guaranteed to last for life, it lasts as long as the balance does. That trade-off, flexibility and potential growth in exchange for no lifetime guarantee, is the key thing to understand about it.
How is it different from the Age Pension or an annuity?
They're three different things people often blur together. An account-based pension is your own super paying you an income, invested and flexible but not guaranteed for life. The Age Pension is a means-tested government payment. An annuity is a product you buy that pays a guaranteed income, often for life, in exchange for giving up access to the capital. Many retirees use a combination, and understanding the distinctions is the first step to seeing how they fit together.
Frequently asked questions
Is an account-based pension the same as the Age Pension?
No. An account-based pension is an income stream from your own super, while the Age Pension is a means-tested payment from the government. Many retirees receive both, but they're entirely separate things.
Can my account-based pension run out?
Yes. It lasts as long as its balance does, so drawing heavily or a long run of weak returns can exhaust it. Unlike a lifetime annuity, it doesn't come with a guarantee to pay for life.
How much can I draw from an account-based pension?
At least the age-based minimum, which for the 2026-27 financial year starts at 4% for those under 65 and rises with age. Above that you generally have flexibility to withdraw more, subject to your balance lasting as long as you need it.
An account-based pension is the engine that turns a balance into an income, and how you set it up shapes the years ahead. Otivo, a licensed Australian financial advice platform holding AFSL and Australian Credit Licence No. 485665, offers a retirement planning module that shows how your super could translate into a pension income, based on your balance, age, spending and Age Pension eligibility. It helps you start the engine with a plan.
Sources
- Australian Taxation Office — retirement phase, transfer balance cap indexation, Division 293 tax and minimum drawdown rates — ato.gov.au
- ASIC MoneySmart — account-based pensions — moneysmart.gov.au
Disclaimer
The information in this communication is current as at July 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. Rates, caps and thresholds referred to are those applying for the 2026-27 financial year and are subject to change. 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.