Account Based Pension

Retirement is about creating a reliable income stream that supports the lifestyle you have worked hard to achieve. For many Australians with a Self-Managed Super Fund (SMSF), an account-based pension is one of the most flexible and tax-effective ways to draw income during retirement.

An account-based pension allows you to convert your superannuation savings into a regular income stream while keeping your money invested. Instead of receiving your entire super balance as a lump sum, your retirement savings remain inside the super environment and continue to generate investment returns while you draw income as needed.

Because of the flexibility and control it offers, the account-based pension is one of the most commonly used retirement income strategies within SMSFs.

What Is an Account-Based Pension?

An account-based pension is a retirement income stream paid from your superannuation account after you have met a condition of release. This generally happens when you:

• Reach preservation age and retire
• Turn 65
• Begin a transition to retirement strategy
• Meet another eligible condition of release under superannuation law

Once your pension starts, the balance supporting the pension remains invested in assets chosen by the SMSF trustees. These may include shares, property, cash, managed funds, or other permitted investments.

The value of your pension account will change over time depending on:

• Investment performance
• Pension withdrawals
• Fees and expenses
• Market movements

Unlike some traditional pensions, there is no guaranteed payment for life. The amount available depends on the remaining account balance and the performance of the investments supporting the pension.

Why Many SMSF Members Choose Account-Based Pensions

One of the biggest advantages of an account-based pension is flexibility. Retirees can usually decide:

• How much income they want to receive above the minimum requirement
• How often they want to receive payments
• Which investments remain in the fund
• How their retirement assets are managed

This flexibility makes account-based pensions particularly attractive for SMSF members who want greater control over their retirement income and investment strategy.

Additional benefits may include:

Tax-Free Pension Income

For individuals aged 60 and over, pension payments received from a taxed super fund are generally tax-free.

Tax Benefits Within the SMSF

Income and capital gains generated on assets supporting retirement phase pensions may become exempt from tax within the SMSF, subject to superannuation rules and limits.

Investment Control

Members maintain control over how their retirement savings are invested, which is one of the key reasons many Australians establish SMSFs.

Estate Planning Opportunities

Account-based pensions can also form part of broader estate planning strategies, helping manage how benefits may pass to beneficiaries.

Starting an Account-Based Pension

To start an account-based pension, a member must first satisfy a condition of release. The pension then commences using part or all of the member’s super balance.

However, there are important rules that apply.

Since 1 July 2017, the amount that can be transferred into retirement phase pensions is limited by the Transfer Balance Cap (TBC). This cap restricts the total amount that can move into the tax-free retirement phase.

If a member already has another pension account or defined benefit income stream, this may affect how much can be used to start a new pension.

Because these rules can become complex, it is important for trustees to obtain professional advice before commencing a pension.

Can You Add More Money to an Existing Pension?

One important rule many people are unaware of is that once an account-based pension starts, new contributions cannot simply be added to the existing pension account.

If additional super contributions are made later, the member generally has two options:

1. Commute the existing pension back to accumulation phase, combine the balances, and start a new pension, or
2. Start a separate pension account using the new contributions

This rule is important when planning future contributions, downsizer contributions, or contribution strategies close to retirement.

Minimum Pension Payment Requirements

Superannuation law requires a minimum amount to be withdrawn from an account-based pension each financial year.

The minimum pension is calculated as a percentage of the pension account balance. The percentage depends on the member’s age.

The formula used is:

$\text{Minimum Pension Payment}=\text{Account Balance}\times \text{Percentage Factor}$

The minimum amount is calculated using:

• The pension balance at 1 July each year
• The member’s age on 1 July

For pensions that commence part way through the year, the minimum payment is generally calculated on a pro-rata basis.

If the pension starts on or after 1 June, no minimum payment is required for that financial year.

Current Minimum Pension Factors

The standard minimum pension drawdown rates are:

These percentages increase with age to ensure retirement savings are progressively drawn down over time.

Governments may temporarily reduce these rates during periods of economic stress. For example, minimum drawdown rates were temporarily halved during the COVID-19 pandemic to help retirees preserve retirement savings during market volatility.

Example of a Minimum Pension Calculation

Consider Jane, who starts an account-based pension with $200,000 at age 64.

Her minimum pension requirement would normally be calculated at 4%.

$200{,}000 \times 4\% = 8{,}000$

This means Jane must withdraw at least $8,000 during the financial year.

If Jane later turns 65 and her pension balance becomes $195,000, her new minimum percentage increases to 5%.

$195{,}000 \times 5\% = 9{,}750$

Her minimum pension for the next financial year would therefore be $9,750.

What Happens If the Minimum Pension Is Not Paid?

Failing to meet the minimum pension requirements can create significant compliance and tax issues for an SMSF.

In some cases:

• The pension may be considered to have ceased for tax purposes
• The fund could lose part of its tax exemption on pension assets
• Additional administration and rectification work may be required

For this reason, trustees should carefully monitor pension withdrawals throughout the financial year and avoid leaving minimum payments until the last minute.

Can You Withdraw More Than the Minimum?

Yes. One of the main advantages of an account-based pension is flexibility.

Apart from transition to retirement pensions, there is generally no maximum withdrawal limit. Members can withdraw more than the required minimum if they need additional funds for:

• Travel
• Home renovations
• Medical expenses
• Helping family members
• Lifestyle spending

However, excessive withdrawals may reduce the longevity of retirement savings. Trustees should consider how much income is sustainable over the long term.

A balanced withdrawal strategy is important to help ensure retirement savings last throughout retirement.

Understanding Investment and Longevity Risk

While account-based pensions offer flexibility, they also carry certain risks.

Investment Risk

The pension account remains invested, which means balances can rise or fall depending on market performance.

Poor investment returns or market downturns may reduce the available retirement balance.

Longevity Risk

There is also the risk of outliving retirement savings if withdrawals are too high or investment returns are insufficient.

Because there is no guaranteed lifetime income, retirees need to carefully manage spending levels and investment strategies.

Many retirees review their pension strategy regularly to ensure it continues to meet their retirement objectives.

Partial Commutations and Lump Sum Withdrawals

An SMSF member can choose to take lump sum withdrawals from their account-based pension through what is called a partial commutation.

A commutation effectively converts part of the pension balance back into a lump sum benefit.

This may be useful for:

• Large one-off expenses
• Restructuring pension balances
• Managing Transfer Balance Cap limits
• Estate planning strategies

However, trustees must properly document any commutation before the payment occurs.

The Australian Taxation Office expects clear evidence that the member intentionally chose to exchange part of their future pension entitlement for a lump sum payment.

Important Changes Since 1 July 2017

Since 1 July 2017, partial commutations no longer count toward satisfying the minimum pension requirement.

This means:

• Minimum pension payments must still be paid separately
• Lump sum commutations cannot replace required pension payments

For example, if a member’s minimum pension requirement is $10,000 and they take a $50,000 lump sum commutation during the year, they must still withdraw the full $10,000 minimum pension separately.

Trustees therefore need to ensure enough funds remain available in the pension account to satisfy the annual minimum payment obligation.

In-Specie Payments and Pension Rules

A pension payment must generally be paid in cash.

If an SMSF transfers an asset directly to a member — such as shares or property — this is usually treated as a lump sum benefit payment rather than a pension payment.

These transactions can have important tax and compliance implications, particularly where pension balances and transfer balance reporting are involved.

Professional advice is strongly recommended before processing any in-specie transfer from an SMSF.

The Importance of Proper Documentation

Running an SMSF requires careful administration and record keeping, especially when pensions are involved.

Trustees should ensure documentation is properly prepared for:

• Pension commencements
• Pension calculations
• Minimum payment records
• Partial commutations
• Lump sum withdrawals
• Transfer Balance Cap reporting

Accurate records help demonstrate compliance with superannuation laws and reduce the risk of issues during audit or ATO review.

Is an Account-Based Pension Right for You?

An account-based pension can be a highly effective retirement income solution for many SMSF members. It offers flexibility, investment control, potential tax advantages, and the ability to tailor retirement income to changing lifestyle needs.

However, successful pension management requires careful planning. Trustees need to consider:

• Investment strategy
• Cash flow requirements
• Tax implications
• Minimum pension obligations
• Longevity of retirement savings
• Transfer Balance Cap limits

Every retiree’s circumstances are different, and the right strategy will depend on individual goals, financial position, and retirement needs.

How We Can Help

Managing an SMSF pension involves more than simply withdrawing money from super. Proper structuring, compliance, reporting, and ongoing monitoring are essential to maximise benefits and avoid costly mistakes.

We assist SMSF trustees with:

• Pension establishment
• Minimum pension calculations
• Transfer Balance Cap reporting
• Pension documentation
• Commutation strategies
• Retirement planning support
• Ongoing SMSF compliance and administration

If you are considering starting an account-based pension or reviewing your existing retirement strategy, our team can help you navigate the rules and structure your pension effectively for long-term retirement success.