Accumulation vs. Pension Phase: Are You Paying 15% Tax for No Reason?

📺 Watch: Accumulation vs Pension Phase Explained

Many Australians head into retirement with their super structured the wrong way. The result? They unknowingly donate thousands of dollars in tax to the ATO every year—money that should be in their own pockets.

The culprit is often a simple misunderstanding of the two phases of superannuation: Accumulation and Pension.

In this guide, we'll break down the difference, calculate the potential tax savings, and help you decide if it's time to make the switch.

1. The Starting Point: Accumulation Phase

If you are still working, your super is likely in the Accumulation Phase.

Think of this as the "building" stage. Your employer pays the Super Guarantee ↗, and you might add salary sacrifice contributions ↗. The goal here is growth.

⚠️ The Tax Trap

While your money grows, the investment earnings are not tax-free. They are taxed at a concessional rate of up to 15%. While this is better than most marginal tax rates ↗, it is not the best deal available to retirees.

📊 Tax Impact Comparison

📄

Accumulation Phase

15%

Investment Earnings Tax

🎉

Pension Phase

Investment Earnings Tax

2. The Goal: Pension Phase (Retirement Phase)

Once you meet a Condition of Release ↗ (usually turning 60 and retiring, or turning 65), you can switch to the Pension Phase (often via an Account-Based Pension ↗).

This is the "spending" stage, and it comes with massive perks:

0% Tax on Earnings: The 15% tax on investment returns drops to zero.
Tax-Free Income: Payments you draw from the account (if you are over 60) are tax-free.
Flexibility: You can choose your payment frequency (fortnightly, monthly, annually).

Real-World Example: How Much Difference Does it Make?

Let's look at Robert (Age 64).

Robert has a Super balance of $500,000. His fund performs well, returning 6% ($30,000) for the year.

❌ Scenario A: Stays in Accumulation

$30,000 gain taxed at 15%
Tax Bill: $4,500
Net Profit: $25,500

✅ Scenario B: Switches to Pension

$30,000 gain taxed at 0%
Tax Bill: $0
Net Profit: $30,000

💰 The Result

By simply filling out some paperwork to switch phases, Robert keeps an extra $4,500 in his account every single year. Over a 20-year retirement, that is nearly $90,000 in saved tax (excluding compound growth!).

🧮 Tax Savings Calculator

See how much you could save by switching to pension phase.

Super Balance ($)

Estimated Return: 6%

1% 10%

By switching to Pension phase, you could save roughly:

$4,500

in tax per year

3. Wait! Why Wouldn't Everyone Switch Immediately?

If Pension phase is tax-free, it seems like a no-brainer. But there are strategic reasons to keep some money in Accumulation.

✅ Check Before You Switch

📥 Do you plan to add more money to Super? ▼

If YES, keep an Accumulation account open. You cannot contribute to a Pension account. If you are still working part-time and want to salary sacrifice, you need to keep an Accumulation account open.

🛡️ Do you have Insurance in Super? ▼

Check if your premiums are deducted from this account. Closing it might cancel your life or TPD cover. Once lost, it can be expensive or impossible to reinstate due to health changes.

👫 Are you under 67 with a younger spouse? ▼

Keeping money in Accumulation might help maximise your partner's Centrelink payments. Money in Accumulation is usually not assessed for the partner's means tests, whereas money in Pension phase is.

💰 The Transfer Balance Cap ▼

You can currently only move $1.9 million (as of 2024-25) into the tax-free Pension phase. Any excess must stay in Accumulation or be withdrawn. Check the current cap on the ATO website ↗.

4. How to Make the Switch (The 5 Steps)

Transitioning isn't automatic. You have to initiate it.

1
Confirm Eligibility
Are you 65? Or 60+ and retired? Or 60+ and left a job? See our guide on accessing super at 60.
2
Decide the Amount
Most people move as much as possible (up to the Transfer Balance Cap) to maximise tax savings.
3
Open the Account
Contact your fund to open a "Retirement Income" or "Account-Based Pension" account. Use our Super Fund Lookup to find contact details.
4
Transfer Funds
Move the money from your old accumulation bucket to the new pension bucket.
5
Set Your Income
Choose how much you want to be paid and how often (monthly/fortnightly). Note: You must withdraw a government-mandated minimum percentage each year (e.g., 4% for those under 65).

Summary: Timing is Everything

Switching too late means donating money to the tax office. Switching too early (or without checking insurance) can lock you out of contributions or lose you valuable cover.

In your final working years, review your structure. A well-timed move could mean thousands more in your pocket, less tax, and a retirement income that lasts longer.

📚 Related Articles & Tools

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Getting Started with Super

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Super Fund Lookup

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🔗 Official Resources

Disclaimer: This information is general in nature. Superannuation rules are complex. We strongly recommend speaking to a licensed financial adviser to tailor a plan for your specific situation.