When you reach retirement, one of the biggest decisions is how to take your super: as a regular income stream (account-based pension), a lump sum, or a combination of both. Each approach has different tax outcomes, Age Pension implications, and longevity risks.
This is general information about how the two options work. The right choice depends on your personal situation — tax position, spending needs, other assets, health, and Age Pension eligibility.
Option 1 — Account-Based Pension (Income Stream)
An account-based pension pays you a regular income from your super while your remaining balance stays invested and continues to grow.
Key features:
- Minimum annual drawdown required (4%–14% depending on age — see the minimum drawdown rates table)
- No maximum drawdown — you can take lump sums at any time
- Earnings in pension phase taxed at 0% (for balances under $3 million)
- Income completely tax-free if you are 60 or over (from a taxed fund)
- The balance continues to grow and can be drawn down progressively
Age Pension impact: The balance of your pension account counts as an asset, and is also subject to Centrelink deeming for the income test. This reduces Age Pension entitlements.
Option 2 — Lump Sum Withdrawal
Taking your super as a lump sum means withdrawing some or all of your balance at once.
Key features:
- If aged 60 or over (from a taxed fund): tax-free
- No ongoing minimum drawdown requirement
- You control how the money is invested or spent outside super
- Once withdrawn, the money loses its super tax concessions permanently
Age Pension impact: A lump sum taken from super ceases to be counted as a super asset. However, if it is deposited in a bank account or invested in non-super assets, it becomes assessable under the assets test as a financial asset and is also deemed for the income test. There is no systematic advantage to converting super to cash from an Age Pension means-test perspective — cash in the bank is also assessed.
Exception — spending the lump sum: If the lump sum is used to pay off debt (e.g. the mortgage on the family home) or spent on a holiday, that cash is consumed and no longer appears in the assets test. The family home is exempt from the assets test. This is why some retirees choose to take a lump sum to pay off their mortgage — the equity in the home is then exempt.
Comparison at a Glance
| Feature | Account-Based Pension | Lump Sum |
|---|---|---|
| Tax on receipt (age 60+) | 0% | 0% |
| Tax on investment earnings | 0% in pension phase | Marginal rate on earnings outside super |
| Longevity protection | Ongoing income until balance depletes | Depends entirely on how you invest |
| Minimum drawdown required | Yes (4%–14% by age) | No |
| Age Pension — assets test | Counted | Counted (unless spent on exempt assets) |
| Flexibility | High | Very high |
| Ongoing super tax concessions | Yes | No — once out, it’s out |
The Tax Advantage of Staying in Super
The most significant difference between the two options is what happens to investment earnings:
- Inside super (pension phase): Earnings are taxed at 0%
- Outside super: Earnings are taxed at your marginal rate (e.g. 32.5% for income between $45,001–$120,000)
For large balances earning, say, $40,000 per year in returns, the difference between 0% and 32.5% tax on those earnings is $13,000 per year. Over a 20-year retirement, this tax difference compounds significantly.
This advantage applies up to the $2.0 million transfer balance cap. For balances above that, the excess must remain in accumulation phase (taxed at 15% on earnings), or be withdrawn.
Longevity Risk — The Case for Staying in Super
Longevity risk is the risk of outliving your savings. The average life expectancy for a 65-year-old Australian is around 85 (men) and 87 (women), but many people live into their 90s. A lump sum, invested outside super and spent at a moderate rate, may not last 25–30 years.
An account-based pension doesn’t eliminate longevity risk — it will also run out if you draw too much — but it:
- Keeps money growing in a tax-advantaged environment for longer
- Provides a structure for managing drawdown rates
- Can be complemented by the Age Pension as a safety net for those who deplete their super
Some retirees address longevity risk by also buying a lifetime annuity with a portion of their super — this provides a guaranteed income for life, regardless of how long they live.
The Case for a Lump Sum (or Combination)
A lump sum may make sense for:
- Paying off the family home: The equity in the home is Age Pension exempt; paying off the mortgage improves the means-test position and eliminates a major expense
- Major one-time expenses (renovation, medical costs, travel)
- Estate planning: Some people prefer to take super as a lump sum and invest outside super where they have more control over estate distribution
- People with short life expectancy: Someone with a terminal illness may prefer a lump sum to maximise available funds immediately
Most retirees use a combination: They take a lump sum for immediate needs (e.g. clearing debt) and leave the remainder in an account-based pension for ongoing income. This is often the most practical approach.
Frequently Asked Questions
Is a lump sum taxed at the same rate as a pension payment? For members aged 60 and over drawing from a taxed super fund, both lump sums and pension payments are completely tax-free. The tax treatment is the same — the difference lies in what happens to the money after it leaves super.
Can I take a lump sum from my pension account and leave the rest? Yes. An account-based pension allows you to make lump sum withdrawals (called commutation) at any time. You can draw additional amounts above your regular pension income whenever you need cash.
If I take a lump sum to pay off my mortgage, does the equity in my home affect my Age Pension? The family home is exempt from the Centrelink assets test. So paying off a mortgage with super and owning the home outright typically improves your Age Pension position — the super was counted as an asset (and deemed), whereas the home equity is not.
For advice tailored to your retirement income situation, speak with a licensed financial adviser. You can find one through the ASIC financial advisers register or MoneySmart.