An allocated pension, now formally called an account-based pension, is a retirement income stream you buy with your Australian superannuation savings: your super balance moves into a personal pension account, you draw regular payments from it, and the balance keeps earning investment returns until it runs down. Once you turn 60, the payments and the earnings inside the account are generally tax-free. In exchange for that treatment, the government sets a minimum you must draw each year, caps how much super you can move into the retirement phase, and counts the balance when working out your Age Pension.
How It Differs From Other Super Products
The money stays in a separate account in your name. It is not pooled with other members’ funds, so your balance rises and falls with the investment options you choose and the payments you take out.1Moneysmart. Account-Based Pensions That makes it fundamentally different from a defined benefit pension, where you receive a fixed payment regardless of market performance. With an allocated pension you choose the mix, whether conservative fixed interest, a diversified balanced option, or higher-growth equities. Strong returns extend the life of the account; weak returns or heavy withdrawals shrink it faster. The capital can eventually run out.
The tax shift from accumulation to retirement phase is the main reason people start one. Earnings in accumulation are taxed at up to 15%.2Moneysmart. Tax and Super Earnings on money sitting in a retirement-phase pension account generally attract no tax at all.3Australian Taxation Office. Tax on Super Benefits
Starting the Pension and Taking Payments
You start an allocated pension by meeting a condition of release, which usually means reaching preservation age and retiring, then transferring a lump sum from your accumulation account into a retirement-phase account. You can transfer all or part of your accumulation balance, subject to the transfer balance cap below. The amount you transfer becomes your opening pension balance, and every future payment comes out of it.
You pick how often you want to be paid: monthly, quarterly, half-yearly, or annually. You also nominate the annual amount, as long as it meets the minimum. There is no maximum on a standard allocated pension, so you can draw as much as you like in a given year, including the entire balance as a lump sum.4Australian Taxation Office. Retirement Withdrawal – Lump Sum or Income Stream
Taking a lump sum from an existing pension is called a commutation. Partial lump-sum withdrawals do not count toward your minimum annual pension payment, so if you commute part of your pension mid-year you still need to pay the minimum separately from regular pension payments.5Australian Taxation Office. Commutations for SMSFs
Minimum Annual Drawdown
Every allocated pension must pay out at least a minimum percentage of the account balance each financial year. The percentage is based on your age on 1 July and rises as you get older. From 2023–24 onwards, the full standard rates apply:6Australian Taxation Office. Payments From Super
- 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 older: 14%
The minimum is worked out from the account balance on 1 July. If you start a pension partway through the year, the minimum is pro-rated based on the number of days remaining in the financial year.
Missing the minimum in any year is costly. The ATO treats the pension as having ceased at the start of that financial year, so the fund cannot claim exempt current pension income on those earnings for the whole year.7Australian Taxation Office. Exception to Minimum Pension Payment Requirements In practice, the earnings become taxable at the 15% accumulation rate instead of being tax-free. On a large balance, that is a serious penalty for an administrative slip.
The Transfer Balance Cap
You cannot move an unlimited amount of super into the tax-free retirement phase. The transfer balance cap sets a lifetime limit. For 2025–26, the general cap is $2 million. It rises to $2.1 million on 1 July 2026.8Australian Taxation Office. Calculating Your Personal Transfer Balance Cap
If you have never started a retirement-phase pension before, your personal cap equals the general cap at the time you first commence one. If you have used some cap space in the past and then commuted amounts back out, your personal cap is calculated using a proportional method that tracks how much space you have used over time. Any super above the cap must either stay in accumulation, where earnings are taxed at 15%, or be withdrawn.
Tax on Payments and Earnings
Every pension payment has two parts: a tax-free component and a taxable component. The split is locked in when the pension starts, based on the proportions of your super balance at that moment. If 25% of your super interest came from non-concessional (after-tax) contributions and 75% from concessional (pre-tax) contributions and earnings, every payment and any commutation keeps that 25/75 split for the life of the pension.9Australian Taxation Office. Calculating Components of a Super Benefit
The tax-free component is always received without any income tax, regardless of your age. What changes with age is the treatment of the taxable component.
From Age 60
All pension payments are entirely tax-free, both components. Earnings inside the pension account are also tax-free.3Australian Taxation Office. Tax on Super Benefits This is why most people wait until 60 to draw on a pension if they can.
Between Preservation Age and 59
The tax-free component is still exempt. The taxable component is included in your assessable income and taxed at your marginal rate, with a 15% tax offset on the taxed element to soften it.10Australian Taxation Office. Super Income Stream Tax Tables If your marginal rate is 32.5%, for example, the offset effectively reduces the tax on the taxable portion to 17.5%. Your super fund reports the component breakdown so you can file your tax return correctly.
Preservation age is now 60 for anyone born on or after 1 July 1964.11Australian Taxation Office. Conditions of Release The between-preservation-age-and-59 scenario now only applies to people who started under the older graduated rules and are still under 60.
Transition to Retirement Pensions Are Different
A transition to retirement income stream (TRIS) is a type of allocated pension you can access after reaching preservation age while still working. It is not the same deal as a standard retirement-phase pension. You can withdraw no more than 10% of the account balance each financial year on top of the usual minimum drawdown, and you cannot take lump-sum commutations while in this phase.4Australian Taxation Office. Retirement Withdrawal – Lump Sum or Income Stream Investment earnings inside a TRIS are taxed at 15%, like accumulation phase, rather than being tax-free.
Once you meet a full condition of release, such as permanently retiring after 60, the TRIS converts to a standard account-based pension. The 10% cap drops off, lump-sum access becomes available, and the earnings become tax-exempt.
Effect on the Age Pension
Your allocated pension counts toward both the income test and the assets test that Services Australia uses to work out the Age Pension. Many retirees are caught out by how much their super pension can reduce their government entitlement.
Services Australia does not look at the actual earnings on your account. It applies deeming rates, assuming your financial assets earn a set rate regardless of real performance. For a single person, the first $64,200 of financial assets is deemed to earn 1.25%, and anything above that is deemed at 3.25%. For couples where at least one receives a pension, the first $106,200 is deemed at 1.25% and the rest at 3.25%.12Services Australia. Deeming If your actual returns beat those rates, the excess is not counted as income.
Your pension balance is also assessed as an asset alongside your other property. A sizeable balance can push you over the asset thresholds and cut your Age Pension down or out entirely.13Services Australia. Assets Test for Age Pension
What Happens on Death
When you set up an allocated pension you can nominate a reversionary beneficiary, usually your spouse. If you die, the pension automatically continues paying to that person without interruption. The balance does not pass through your estate or need probate, which makes it a straightforward estate planning tool within super.
The reversionary pension balance is credited to the surviving beneficiary’s transfer balance account 12 months after the date of death, giving them time to rearrange their finances.14Australian Taxation Office. Transfer Balance Account If that credit pushes the survivor over their personal cap, they need to commute the excess back to accumulation or take it out as a lump sum.
If you have not nominated a reversionary beneficiary, the balance is paid out to your nominated beneficiaries or your estate as a lump-sum death benefit. Most funds offer binding and non-binding nominations. A binding nomination legally requires the trustee to follow your instructions. A non-binding nomination is treated as a suggestion and the trustee has discretion. Binding nominations in many funds expire after three years and need renewing, though some trust deeds allow non-lapsing binding nominations that stay in force until you change them. Checking which type your fund offers, and keeping your nomination current, is one of the most commonly neglected pieces of super admin.
Division 296 From 1 July 2026
From 1 July 2026, a new tax applies to individuals whose total superannuation balance exceeds $3 million. Division 296 imposes an additional 15% tax on the notional earnings attributable to the portion of super above the $3 million threshold.15Australian Taxation Office. Better Targeted Superannuation Concessions Notional earnings include both realised and unrealised gains, so the tax can apply to paper profits you have not actually received.
For a large allocated pension, this changes things. Earnings inside a retirement-phase pension have been completely tax-free. Division 296 brings in a tax on growth above $3 million regardless of which phase the super is in. The $3 million threshold is not indexed, so over time more retirees will be affected as balances grow. If your total super balance is approaching this level, the interaction with your allocated pension is worth working through with a financial adviser before the measure takes effect.