An allocated pension, now officially called an account-based pension, is a retirement income stream you buy with your Australian super savings once you’ve retired or otherwise met a condition of release. Your accumulated super moves into a separate account in your name, stays invested in options you choose, and pays you regular income until the balance runs out. Once you turn 60, both the investment earnings inside the account and the payments you receive are generally tax-free. You control the payment frequency and amount within a government-set minimum, and you can take extra as a lump sum whenever you need to.
How the Account Is Structured
The money in an allocated pension is not pooled with other members’ funds. It sits in an individual account, rises and falls with the investment returns on the options you’ve selected, and shrinks as payments are drawn. That makes it fundamentally different from a defined benefit pension, which pays a fixed amount regardless of market performance. Here, strong returns extend how long the account lasts, and poor returns or heavy withdrawals shorten it.
You pick the investment mix from what your fund offers, whether that’s conservative fixed interest, a diversified balanced option, or something weighted toward equities. The capital draws down gradually over retirement, and it can eventually be exhausted. There’s no guarantee it will last a set number of years.
Starting the Pension and Receiving Payments
To begin, you transfer a lump sum out of your super accumulation account into a retirement-phase pension account. You can move all or part of your accumulation balance, subject to the transfer balance cap covered below. The amount you transfer becomes your opening pension balance, and every future payment comes out of it.
You then choose how often you want to be paid: monthly, quarterly, half-yearly, or annually. You nominate an annual payment amount, provided it meets the minimum drawdown rule. There’s no maximum on a standard allocated pension, so you can draw more when you need it, up to and including the full balance as a lump sum.1Australian Taxation Office. Retirement Withdrawal – Lump Sum or Income Stream
Taking a lump sum from an existing pension is called a commutation. A useful detail: partial lump-sum withdrawals don’t count toward your minimum annual pension payment. If you commute part of your pension mid-year, the minimum still needs to be paid separately as regular pension payments.2Australian Taxation Office. Commutations for SMSFs
The Minimum You Must Draw Each Year
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 at 1 July and rises as you get older:3Australian 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 calculated using the balance on 1 July. If you start a pension partway through the year, the amount is pro-rated based on the days remaining in the financial year.
Missing the minimum in any year has real consequences. The ATO treats the pension as having ceased at the start of that financial year, and the fund loses the ability to claim exempt current pension income on the earnings from those assets for the entire year.4Australian Taxation Office. Exception to Minimum Pension Payment Requirements Those earnings then get taxed at the 15% accumulation rate instead of being tax-free. On a large balance, that’s expensive.
How the Payments Are Taxed
Every pension payment has two parts: a tax-free component and a taxable component. The proportion is set when the pension starts, based on the makeup of your super interest at that moment. If a quarter of your super came from non-concessional (after-tax) contributions and three-quarters came from concessional contributions and earnings, every payment and every commutation keeps that same 25/75 split for the life of the pension.5Australian Taxation Office. Calculating Components of a Super Benefit
The tax-free component is always received without any income tax. What happens to the taxable component depends on your age.
From Age 60
All pension payments are entirely tax-free, both components. The investment earnings inside the pension account are also tax-free.6Australian Taxation Office. Tax on Super Benefits This is the main reason most people wait until 60 to draw on the pension where they can. While super sits in accumulation, earnings are taxed at up to 15%.7Moneysmart. Tax and Super Move it into an allocated pension and that tax generally disappears.
Between Preservation Age and 59
The tax-free component of your payments is still exempt. The taxable component gets added to your assessable income and taxed at your marginal rate, with a 15% tax offset applied to the taxed element.8Australian Taxation Office. Super Income Stream Tax Tables On a 32.5% marginal rate, the offset effectively brings the tax on the taxable portion down to 17.5%. Preservation age is now 60 for anyone born on or after 1 July 1964,9Australian Taxation Office. Conditions of Release so this middle scenario now only applies to people who started their pension under the older graduated rules and are still under 60.
The Limit on What Can Sit in Retirement Phase
You can’t 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, and on 1 July 2026 it rises to $2.1 million.10Australian Taxation Office. Calculating Your Personal Transfer Balance Cap
If you’ve never started a retirement-phase pension before, your personal cap equals the general cap at the time you first commence one. If you’ve already used some of your cap and commuted amounts back out, your personal cap is worked out proportionally, tracking how much cap space you’ve used over time. Anything over the cap has to stay in accumulation, where earnings continue to be taxed at 15%, or come out as a withdrawal.
Transition to Retirement Is Not the Same Product
A transition to retirement income stream (TRIS) is a specific type of allocated pension you can start after reaching preservation age while still working. Two things make it different from a standard account-based pension. First, there’s a 10% cap: you can withdraw no more than 10% of the account balance in a financial year, on top of the usual minimum.1Australian Taxation Office. Retirement Withdrawal – Lump Sum or Income Stream Lump-sum commutations aren’t available. Second, the tax advantages are narrower: investment earnings inside a TRIS are taxed at 15%, like accumulation phase, rather than being exempt.
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 disappears, lump-sum access opens up, and the investment earnings become tax-exempt.
How It Affects the Age Pension
Your allocated pension balance counts toward both the income test and the assets test that Services Australia uses for Age Pension eligibility. This surprises a lot of retirees.
For the income test, Services Australia doesn’t look at what your pension actually earns. It applies “deeming rates,” assuming your financial assets earn a set rate. For a single person, the first $64,200 of financial assets is deemed to earn 1.25% a year and anything above that 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%.11Services Australia. Deeming If your actual returns beat those rates, the extra isn’t counted.
The assets test looks at your pension balance as an asset alongside your other property. From 20 March 2026, a single homeowner can hold up to $321,500 in assessable assets and still receive the full Age Pension, and a homeowner couple $481,500. Payments cut out entirely at $722,000 for a single homeowner and $1,085,000 for a couple.12Services Australia. Assets Test for Age Pension A sizeable allocated pension balance can push you past these thresholds and reduce or eliminate your entitlement.
What Happens to the Pension When You Die
When you set up the pension, you can nominate a reversionary beneficiary, usually your spouse. If you die, the pension keeps paying to that person without interruption. The balance doesn’t pass through your estate and doesn’t need probate, which makes it one of the simpler estate planning tools within super.
The reversionary pension balance is credited to the surviving beneficiary’s transfer balance account 12 months after the date of death.13Australian Taxation Office. Transfer Balance Account That 12-month window matters if the survivor is already close to their own cap, because it gives them time to commute some of their existing pension to make room. Otherwise the excess needs to be moved back to accumulation or withdrawn.
If you don’t nominate a reversionary, the remaining balance is paid 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 one is a suggestion the trustee can override. Binding nominations in many funds expire after three years and need renewing, though some trust deeds allow non-lapsing binding nominations. Checking which type your fund offers, and keeping the 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. Known as Division 296, it imposes an additional 15% tax on the notional earnings attributable to the portion of super above the $3 million threshold.14Australian Taxation Office. Better Targeted Superannuation Concessions Notional earnings includes both realised and unrealised gains, so the tax can apply to paper profits you haven’t actually received.
For a large allocated pension, this changes things. Retirement-phase earnings have been fully tax-free for years. Division 296 layers a tax on growth above $3 million regardless of which phase the super is in. The $3 million threshold isn’t indexed, so more retirees will be caught over time as balances grow. If your total super balance is approaching that level, the interaction between Division 296 and your allocated pension is worth discussing with a financial adviser before it takes effect.