Account-Based Pension vs Annuity: The Retirement Income Decision in 2026

When you turn accumulation super into retirement income in Australia, you choose between three structures: an account-based pension (ABP) that keeps your balance invested and pays a flexible drawdown, a lifetime annuity that exchanges your lump sum for guaranteed income for life, or a hybrid combining both. For most retirees a pure ABP is still the right call. But two policy shifts — the 1 July 2019 Centrelink means-test rules for lifetime income streams, and the 1 July 2022 Retirement Income Covenant — have pulled lifetime annuities back into serious consideration. The right structure depends on four levers: longevity-risk appetite, market-risk tolerance, income certainty over your essential-spending floor, and bequest motive. Different weightings produce different right answers, and it’s largely a once-only structural setup refined over time, not re-made annually.

I’m Maciej Stanek, Senior Financial Adviser and Director at Véurr Financial Planning. For most of my career the default answer to “how do I turn my super into income that lasts?” was a pure ABP (unless you are in a Defined Benefit scheme) — the flexibility, the tax-free retirement-phase earnings, and post-2007 super simplification made it the natural choice. That default has loosened: for some retirees in 2026 a hybrid is genuinely right, for others a pure ABP remains the call, and for a smaller group a pure annuity makes sense. This guide walks through what each structure is, what changed, the four levers in the decision, how Centrelink treats each, and the framework Imran and I use.

Account-based pension: what it actually is

An account-based pension is the most common retirement-income-stream structure in Australia. You convert accumulation super into retirement phase once you meet a condition of release (typically age 65, or full retirement after preservation age), then draw a regular income from the account. Three features define it. First, you retain control of the balance — it stays invested per your chosen asset allocation, returns flowing in and drawdowns out. Second, the ATO sets a minimum drawdown percentage each financial year that steps up by age band, with no maximum cap. Third, fund earnings in account-based pension phase are taxed at 0% (subject to the Transfer Balance Cap), and payments to you are tax-free from age 60.

What an ABP doesn’t do is guarantee the income lasts: if returns underperform or drawdowns are too high, the balance can run to zero. That longevity risk sits with you — the central reason annuities still belong in the conversation.

The ATO sets the minimum drawdown rates and the Transfer Balance Cap (the cap on how much super can support tax-free retirement-phase earnings); both are indexed, so we check the current values rather than rely on a static figure.

Annuity: what it actually is

An annuity is a contract with a regulated provider — typically a life insurer — under which you exchange a lump sum for a defined income stream. A lifetime annuity pays for the rest of your life; a fixed-term annuity for a chosen number of years. Three features define it. First, the provider takes both the longevity and investment risk: the income is guaranteed regardless of how markets perform or how long you live. Second, the income amount is set at purchase, and may be fixed in dollars, CPI-indexed, stepped, or investment-linked. Third, once you’ve bought a standard lifetime annuity the lump sum is gone — you can’t withdraw it or pass the capital to a beneficiary outside the contract, unless you elected reversionary, joint-life, or guarantee-period options at purchase.

The trade-off in one sentence: certainty for life in exchange for flexibility and access to capital.

Inflation protection varies by product and materially affects long-term purchasing power — a non-indexed annuity at 65 buys substantially less at 90 even though the dollar payments are unchanged. ASIC Moneysmart’s annuities guide sets out the main product types; the Product Disclosure Statement (PDS) of any specific product sets out the death-benefit and indexation terms — read it carefully before purchase.

What changed in 2019 and 2022 that’s brought annuities back into the conversation

Two policy shifts have brought lifetime annuities back into serious consideration. The first is the 1 July 2019 update to how Centrelink means-tests “innovative” lifetime income streams for the Age Pension: the rules generally count 60% of payments under the income test and a declining proportion of purchase price under the assets test, stepping lower past a defined age threshold. The effect: for retirees on the cusp of means-test thresholds, a lifetime annuity now often produces a lower assets-test count than the equivalent ABP balance — and a higher Age Pension entitlement.

The second is the 1 July 2022 Retirement Income Covenant, which placed a positive legal obligation on APRA-regulated super trustees to formulate retirement-income strategies for their members. Together with new product entries since, the ABP-versus-annuity decision now genuinely has a second viable answer.

The mechanics are on the Services Australia page on lifetime income streams purchased on or after 1 July 2019 and in the Treasury overview of the Retirement Income Covenant. The decision hasn’t flipped — for most retirees an ABP remains the right (or majority) structure. It’s that a lifetime annuity, often as part of a hybrid, is now a strong contender it wasn’t for most of the 2010s.

The four key levers in the ABP-versus-annuity decision

The decision turns on four levers, not one.

• Lever 1 — longevity-risk appetite: how comfortable you are with outliving your money. An ABP places that risk on you; a lifetime annuity transfers it to the provider.
• Lever 2 — market-risk tolerance: how comfortable you are with your retirement capital moving with markets. An ABP keeps you exposed; a lifetime annuity removes that exposure.
• Lever 3 — income-certainty requirement: how much of your essential-spending floor (housing, food, utilities, insurance, healthcare) needs guaranteed income versus can flex with markets.
• Lever 4 — bequest motive: how important it is to leave residual balance to a partner, children, or other beneficiary. ABPs preserve a residual; standard lifetime annuities generally don’t.

Different weightings produce different right answers — there’s no universal recommendation.

Two of these shift with age. Many retirees can’t say how comfortable they are with longevity risk until they’ve thought about it specifically — if you knew you’d live to 92, would you still be happy drawing your current rate from your current balance? And a market drop that felt manageable at 60 with a 30-year horizon can feel very different at 75. The right mix usually follows from how you actually feel about these at your age and stage.

Tax treatment of each, in plain English

On the income-stream side, the tax treatment of ABPs and lifetime annuities purchased from super money is broadly equivalent for retirees aged 60 and over: payments are tax-free and excluded from assessable income. (For the now-narrow under-60 cohort, payments are assessable with a 15% offset on the taxable component.)

The rules diverge on the fund-earnings side. ABP fund earnings in retirement phase are taxed at 0% (subject to the Transfer Balance Cap) — any amount above the TBC must be drawn out or moved back to accumulation phase, taxed at 15%. A super-money annuity sits within the same TBC framework. An ordinary annuity bought with non-super money is different — a portion of each payment is a tax-free return of capital, the remainder assessable.

For most super-money decisions, tax isn’t the deciding factor — the other four levers are.

How Centrelink treats each for Age Pension purposes

For retirees who qualify for at least some Age Pension, this is one of the most consequential differences between the structures.

Centrelink treats an ABP as a financial asset: the full balance counts under the assets test and is “deemed” — a deeming rate on the balance counts as income (the actual payment isn’t separately counted).

It treats a lifetime annuity purchased on or after 1 July 2019 under separate innovative-income-stream rules: a declining proportion of the purchase price counts under the assets test (higher up to a specified age threshold, lower beyond), and a defined proportion of each payment (typically 60%) under the income test. The practical effect for retirees on the cusp of means-test thresholds: capital in a lifetime annuity often produces a higher Age Pension entitlement than the same capital in an ABP.

Check current deeming rates, percentages and thresholds on the Services Australia income test page and the lifetime income streams page before modelling — these shift. One caveat that catches people out: lifetime income streams purchased before 1 July 2019 are assessed under different (mostly older) rules, so a pre-2019 annuity is modelled under the rules that applied when you purchased it.

The hybrid approach: when ABP plus annuity makes sense

For a portion of retirees the right structure is ABP-and-annuity, not ABP-or-annuity. The hybrid uses a lifetime annuity to cover the essential-income floor (housing, utilities, food, insurance, healthcare, basic transport) and an ABP for the discretionary layer (travel, hobbies, larger one-off expenses).

The approach: identify the floor; identify guaranteed-income sources already in place (Age Pension, CSS, PSS, DFRDB, MSBS DB component); if there’s a gap, size a lifetime annuity to close just that gap; run the rest as an ABP. The smaller the annuity, the more flexibility and bequest potential retained.

The hybrid suits retirees without a substantial lifetime-indexed defined-benefit pension already doing the floor-protection work. CSS and DFRDB members usually don’t need one — their scheme pension already functions as the annuity portion; PSSap, ADF Super, and accumulation-only retirees are the more typical candidates.

The decision framework: a five-step approach

When a client asks whether to structure as an ABP, an annuity, or a hybrid, we work through five steps in order.

1. Identify the essential-income floor — annual spending on housing, utilities, food, insurance, healthcare, transport, and basic communication.
2. Map your guaranteed-income sources — Age Pension, any defined-benefit scheme pension (CSS, PSS, PSSap-DB component, DFRDB, MSBS DB component), existing annuities; compare the total to the floor.
3. Assess longevity exposure and market-risk tolerance honestly, against your balance and life-expectancy projections.
4. Model bequest priorities — a strong motive favours ABP; a weak one opens up annuity options.
5. Structure accordingly — pure ABP if guaranteed sources cover the floor and bequest matters; ABP-plus-small-annuity for a moderate floor gap; a larger annuity portion where guaranteed sources are minimal and bequest isn’t a priority; pure lifetime annuity only where longevity risk dominates.

The framework doesn’t produce the same answer for everyone — it produces your answer, depending on your situation across all five steps.

The most common mistake I see clients make

In my work with retirement-stage clients, the discussion that recurs when the ABP-versus-annuity decision comes up is “if I set up an annuity I have no access to the capital.”

Most clients fail to appreciate that a lifelong income stream, when set up, will equate to much more in income than the capital given up.

Talking to a client who is currently 68, I presented to her an idea of allocating $200K out of her $500K accumulated super fund into a lifetime annuity with a fixed 3% annual indexation. The annual payment in year one is estimated to be approximately $11,500, and the payment rises by 3% each and every single year. You can quickly calculate that it would not even take 14 years for her to have had her capital returned to her. Meanwhile the annuity continues until you pass away, and most women in Canberra have a life expectancy of approximately 86. That, plus the Centrelink payments that can increase for her as a result of allocating her super monies in this fashion, adds up to a significant benefit (in her specific circumstance she was entitled to over $6K per annum more in Age Pension than if she left the money in an ABP).

From a financial-planning point of view, this strategy made a lot more sense and provided significantly more security, but she kept coming back to the point that she would have, in her words, “lost the $200,000” lump sum.

How this interacts with the specialist schemes

For Commonwealth public servants and Defence Force members, the decision often looks different from the generic case, because their existing scheme entitlements already overlap with what a lifetime annuity provides.

• CSS members hold what is effectively a built-in lifetime annuity — a guaranteed indexed defined-benefit pension for life — so the question usually applies only to separate accumulation super held outside CSS.
• PSS members who take the pension option receive a lifetime indexed pension that functions like an annuity; their larger decision is pension-versus-lump-sum at separation.
• DFRDB members receive a lifetime indexed pension with a commutation option; the retained portion functions like an annuity.
• MSBS combines DB and accumulation components, with the question applying to the accumulation side; ADF Super is pure accumulation, so the full framework applies.
• Accumulation-only retirees are the cleanest case — the entire balance is in scope.

For the scheme detail, see our guide to financial planning for public servants (CSS, PSS, PSSap) and our DFRDB, MSBS and ADF Super guide. For high-balance retirees, the proposed Division 296 super tax adds a consideration — both ABPs and annuities held within super fall in the proposed Division 296 base. For broader context see our retirement planning material in the cornerstone guide, and for those retiring off a redundancy, our redundancy guide for Canberra public servants. If a transition into retirement phase is in play, see our transition-to-retirement guide; for CSS members weighing the new APS voluntary redundancy window, our CSS 54-11 bridging-from-VR guide.

Talking to a specialist about your retirement-income structure

The ABP-versus-annuity-versus-hybrid decision is largely a once-only structural setup, and the cost of getting it materially wrong compounds over decades.

Frequently asked questions about ABP versus annuity