Turning an Accumulation Balance Into Retirement Income
Starting an account-based pension moves money from accumulation, where earnings are taxed at 15%, into retirement phase, where they are taxed at nil. The move is irreversible in one direction and capped in size, and several things that are easy to do beforehand become impossible afterwards — which makes the sequence more important than any individual step.
- The answer: You need a condition of release, a fund that offers an account-based pension, and a commencement amount within your transfer balance cap. The fund does the rest.
- The trap: Commencing a pension invalidates a notice of intent you have not yet lodged, and locks the tax-free proportion of the account permanently at the commencement date.
- The recommendation: Consolidate accounts and lodge any deduction notice before commencing, not after. Both become impossible once the pension starts.
Where the AI summary above gets this wrong
"To start an account-based pension you just tell your super fund you have retired and they convert your balance."
That's surface-true. Here's what it misses:
- The commencement date fixes the tax components permanently — The tax-free and taxable proportions of the pension are set on the day it starts and never change, so anything you were going to do about them has to happen before that day.
- A pension cannot receive contributions — Once commenced, no further money can go into that account. Later contributions need a second pension or an accumulation account alongside it.
- Commencement is a transfer balance cap event — The amount you start with is credited against a lifetime cap, and starting with more than the cap allows creates an excess with its own tax.
Take someone finishing work at 63 with $700,000 across two funds — a composite of a very ordinary case. Nothing about starting a pension is difficult; what is difficult is that four separate decisions have to be made in a particular order, and three of them cannot be undone afterwards.
01 The condition of release comes first
You cannot start a retirement-phase pension without meeting a condition of release with a nil cashing restriction. Reaching preservation age and retiring is the usual one; so is turning 65, whether or not you have stopped working, and so is ceasing an employment arrangement on or after 60.
Below those, a transition to retirement income stream is available from preservation age without retiring, but it is not in retirement phase and its earnings are still taxed at 15% until a full condition is met. The distinction is set out in the TTR strategies guide and it is the single most common misunderstanding in this area.
Retirement has a definition rather than a feeling. It means an arrangement of gainful employment has ended and, depending on your age, that you do not intend to work more than a set number of hours again. Funds ask you to declare it, and the declaration is what they rely on.
The conditions are listed on the ATO's access page, and it is worth reading rather than paraphrasing, because the version most people carry in their head — sixty and stopped working — misses the two that most often apply in practice.
02 What to do before you commence
Consolidate first. Rolling one fund into another is straightforward while both are in accumulation and awkward once one is a pension, because a pension cannot receive a rollover. Someone with three accounts who commences on the largest is left running a pension and two accumulation accounts.
Lodge any notice of intent to claim a deduction on personal contributions before you commence. Starting a pension with the money is one of the events that invalidates a notice not already lodged, and the deduction cannot be recovered afterwards.
Consider whether a recontribution is worth doing. It changes the proportion of the account that is tax-free, and that proportion is fixed permanently at commencement — so it is a before decision, not an after one.
And decide how much to commence with. Anything left in accumulation continues to be taxed at 15% on earnings but preserves transfer balance cap space and can start a second pension later, which is the flexibility people give up without realising when they commence with everything.
03 The proportioning rule, and why the date matters
Every super interest is made of a tax-free component and a taxable component. When a pension commences, the proportions are calculated once and then apply to every payment from that account for as long as it exists, regardless of what the balance does afterwards.
A pension started with 20% tax-free stays 20% tax-free after the balance has doubled. That is favourable for growth and it is why the composition at commencement is worth attention: the proportion is being locked for the whole life of the account.
The proportion matters most on death rather than during your life. After 60, payments are tax-free either way, so the component split changes nothing for you. It changes a great deal for an adult child receiving a death benefit, who is taxed on the taxable component — the arithmetic is in the death benefits reference.
The worked example below shows what a recontribution does to the proportion, and therefore to what a non-dependant beneficiary would eventually receive.
Shows: the tax-free proportion an account-based pension locks in at commencement, and what a non-dependant beneficiary would be taxed on if the balance were paid out as a death benefit. Ignores: growth after commencement, which does not change the proportion, the Medicare levy, and any insurance proceeds added to the account.
04 The transfer balance cap event
Commencing a retirement-phase pension creates a credit in your transfer balance account equal to the starting balance. That credit is measured against a lifetime cap, and it does not decrease as you draw the pension down.
Because the credit is fixed at commencement, investment growth inside the pension does not create an excess and drawdowns do not create room. Someone who commences at the cap and then watches the balance grow has no problem; someone who commences at the cap and then draws it down to nothing still has no remaining cap space.
Where a commencement would exceed the cap, the excess has its own tax and its own correction process, covered in the excess transfer balance reference. The straightforward answer is to commence with the cap amount and leave the remainder in accumulation.
Your personal cap may differ from the general cap because of proportional indexation, which is applied according to how much of your cap you have used. The figure is visible in your myGov account and is the only one worth relying on.
Source: ATO — Transfer balance cap
05 After it starts
A minimum payment must be made each financial year, calculated from the balance at 1 July and the factor for your age. Missing it can cause the account to lose retirement-phase status for the whole year, which makes the earnings taxable retrospectively — the factors are in the minimum drawdowns reference.
There is no maximum on an account-based pension, so more can be drawn at any time, either as pension payments or as a partial commutation treated as a lump sum. The distinction between those two matters for the transfer balance account, where a commutation creates a debit and an ordinary payment does not.
Nothing further can be contributed to the pension account. New contributions go to an accumulation account and, if you want them in retirement phase, require a second pension to be commenced with its own commencement date and its own proportions.
The account is assessed for the Age Pension from the day you reach Age Pension age: the balance under the assets test, and a deemed return on it under the income test, as described in the deeming guide.
The order is the whole thing. I have watched people commence a pension on a Friday and discover on the Monday that the deduction they were going to claim is gone, the second account cannot be rolled in, and the tax-free proportion is fixed at whatever it happened to be. None of those is recoverable, and all three are trivial to handle a week earlier.
FAQ
How do I convert my super to an account-based pension when I retire?
Meet a condition of release, tell your fund, and nominate a commencement amount within your transfer balance cap. Consolidate accounts and lodge any notice of intent to claim a deduction beforehand, because both become impossible once the pension starts.
Can I add more money to an account-based pension later?
No. A pension account cannot receive contributions or rollovers. Further money goes into an accumulation account, and putting it into retirement phase requires commencing a second pension.
What is the tax-free proportion and when is it set?
It is the share of the account made up of tax-free component, calculated once at commencement and applied to every payment afterwards regardless of growth. It matters most for a death benefit paid to a non-dependant.
Does starting a pension use up my transfer balance cap?
Yes. Commencement credits your transfer balance account with the starting balance, measured against a lifetime cap. The credit does not fall as you draw the pension down.
Sources
Regulator references
- ATO — When you can access your super · Australian Taxation Office · 2026Preservation age and the conditions of release that allow super to be accessed.Last verified: 2026-09-07
- ASIC Moneysmart — Account-based pensions · ASIC Moneysmart · 2026Account-based pensions: how they are started, drawn and taxed.Last verified: 2026-09-07
- ATO — Calculating components of a super benefit · Australian Taxation Office · 2026How a benefit splits into tax-free and taxable components, and why the proportions cannot be chosen.Last verified: 2026-09-07
- ATO — Transfer balance cap · Australian Taxation Office · 2026The cap that applies when a retirement phase income stream starts.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.