What Is the Difference Between a Superannuation Accumulation Account and an Account-Based Pension?
Many Australians spend decades contributing to superannuation but are surprised to learn that there are actually two different phases of super: the accumulation phase and the retirement phase.
Understanding the difference can save thousands of dollars in tax and help you make better decisions as you approach retirement.
Think of superannuation like a bucket:
Accumulation Account
Money is going into the bucket.
You are still building wealth.
Contributions are generally being made by you or your employer.
Investment earnings are taxed.
Account-Based Pension
Money is coming out of the bucket.
You are using your super to fund retirement.
You must draw a minimum income each year.
Investment earnings are generally tax-free.
For most people, the accumulation account is used while working, and the pension account is used once they retire.
Tax Treatment
While in accumulation phase:
Concessional contributions are generally taxed at 15%
Investment earnings are generally taxed at up to 15%
Capital gains on investments held longer than 12 months may receive a one-third CGT discount
Although these tax rates are generally lower than personal tax rates, tax is still being paid inside the fund.
A Pension:
Incurs no tax on withdrawals
Incurs tax on income and CGT the same way an accumulation account does when it is considered a TTR Pension
Incurs no tax on income and CGT when it is considered a Full Account Based Pension
Example: John and Susan each have $1 million invested. If that money earns 7% per annum income yield:
Accumulation Account
Earnings: $70,000
Tax payable inside super: up to $10,500
Net earnings: approximately $59,500
Account-Based Pension
Earnings: $70,000
Tax payable: $0
Net earnings: $70,000
That difference can compound substantially over retirement.
What Is an Account-Based Pension?
An Account-Based Pension (ABP) is a retirement income stream that can be established using your superannuation balance.
Rather than building wealth, the purpose of the account is to provide you with an income during retirement.
Once established, you can generally:
Receive regular payments
Choose how frequently you are paid
Select the amount you wish to receive (subject to minimum drawdown requirements)
Continue investing the remaining balance
Importantly, your money remains invested and continues to participate in market growth and income.
Why Many People Should Consider an Account-Based Pension at Age 65
One of the biggest mistakes we see is people reaching age 65 and continuing to leave all of their superannuation in an accumulation account simply because they are still working.
In reality, turning age 65 is itself a condition of release. You do not need to retire to access your super or commence an Account-Based Pension.
This means many Australians can continue working while simultaneously enjoying the tax benefits of Account Based Pensions.
Example: Consider Peter who:
Is age 65
Continues working three days per week
Has $1,000,000 in super
Earns 7% per annum income yield
If Peter leaves the entire balance in accumulation phase, the fund may pay up to 15% tax on approximately $70,000 of annual earnings. This could reduce his after-tax earnings by around $10,500 each year.
If Peter instead transfers most or all of his super into an Account-Based Pension, those same investment earnings may become tax-free.
Over a retirement lasting 20 to 30 years, the cumulative benefit can be enormous.
While everyone's circumstances are different, one of the first discussions we have with clients approaching age 65 is whether it still makes sense to have large amounts remaining in accumulation phase. In many cases, retaining substantial balances in accumulation unnecessarily results in ongoing tax being paid on investment earnings.
For this reason, it is important that retirees and semi-retirees review whether most of their super should be transferred to an Account-Based Pension once eligible.
Do I Lose Control of My Money?
No.
One of the most common misconceptions is that converting to an Account-Based Pension locks your money away.
In reality, you generally retain flexibility.
You can usually:
Withdraw additional lump sums
Change your regular pension payments
Alter investment options
Roll the balance to another provider if required
Unlike some older-style pensions, most modern Account-Based Pensions are highly flexible.
What Are the Minimum Pension Payments?
Once an Account-Based Pension commences, the government requires a minimum amount to be withdrawn each financial year.
Current standard minimum rates include:
Under 65: 4%
Age 65 to 74: 5%
Age 75 to 79: 6%
Age 80 to 84: 7%
Age 85 to 89: 9%
Age 90 to 94: 11%
Age 95+: 14%
These percentages are based on your account balance at 1 July each year.
There is generally no maximum withdrawal amount for a standard Account-Based Pension, however, TTR pensions are capped at 10% per annum.
When Can I Move to an Account-Based Pension?
To commence an Account-Based Pension, you generally need to satisfy a condition of release.
Common examples include:
Retiring after reaching preservation age
Turning age 65
Meeting another eligible condition of release
Importantly, many people assume they must retire before commencing an Account-Based Pension. This is not always true.
Someone who turns age 65 can generally establish an Account-Based Pension regardless of whether they continue to work.
The decision should also be considered alongside:
Tax outcomes
Centrelink implications
Estate planning objectives
Cashflow requirements
Future contribution strategies
What Happens If I Return to Work?
Another common misconception is that an Account-Based Pension must be converted back into a Transition to Retirement (TTR) Pension if you return to work.
In most situations, this is incorrect.
If you have met a full condition of release, such as retiring after age 60 or turning age 65, and subsequently commence an Account-Based Pension, that pension can generally continue even if you later decide to return to work.
Can I Have Both Accounts at the Same Time?
Yes.
Many retirees maintain both an accumulation account and an Account-Based Pension simultaneously.
This may occur where:
They continue making super contributions
They have not transferred their full balance to pension phase
They are implementing tax or estate planning strategies
For example, a person could have $1 million in an Account-Based Pension and continue working, with new employer contributions being directed into a separate smaller accumulation account.
Having both accounts is very common and can be an effective strategy in the right circumstances.
Final Thoughts
For many Australians, the move from an accumulation account to an Account-Based Pension is one of the most important financial decisions they will make.
The transition can significantly improve tax efficiency, create a reliable retirement income stream and potentially enhance retirement outcomes. However, timing matters, and the best approach depends on your personal circumstances.
Importantly, many people do not realise that:
Turning age 65 is itself a condition of release, even if they continue working.
Investment earnings within an Account-Based Pension are generally tax-free.
Leaving substantial balances in accumulation phase after becoming eligible for an Account-Based Pension can result in unnecessary tax.
Once a genuine retirement phase Account-Based Pension has commenced after meeting a full condition of release, it can generally continue even if the person later returns to work.
If you're approaching retirement, have recently turned 65, or want to confirm whether your superannuation is structured as efficiently as possible, professional advice can help ensure you're making the most of the opportunities available:
About the Author
Michael Sauer CFP® is the Director of Source Wealth and helps Australians navigate retirement, superannuation, Centrelink and investment decisions. He specialises in creating practical retirement strategies that aim to maximise income, reduce tax and provide confidence for the years ahead.
Comments