What Australians Lose by Staying in the Accumulation Phase Too Long
- May 14
- 15 min read
Written by Christopher Hall, AdvDipFP | Authorised Representative, AFSL 526688 | May 2026
Staying in the accumulation phase beyond the point of eligibility costs super fund members up to 15% tax on every dollar their fund earns — tax that a retirement phase account eliminates entirely. Since 2017, eligible Australians have collectively forgone $13.5 billion in tax-free investment returns by not making the switch when they became eligible (HESTA and Laneway Analytics, 2026).
The cause is not complexity. For members of APRA-regulated funds, the mechanism to switch is straightforward. The cause is inertia: Australia's superannuation system defaults to doing nothing, and doing nothing has a measurable, compounding cost.
Arrow Equities' earlier article on how much super Australians need to retire comfortably provides depth and context on adequacy targets and income gap calculations. This article addresses the structural question that follows: once a sufficient balance has been built, the account type it sits in determines how much tax it pays each year.
This article covers what changes when eligible Australians transition from accumulation to retirement phase, what the 15% earnings tax costs in real dollar terms across different balance levels, who is most affected, the key considerations before making the switch — including what happens to insurance held in the accumulation account — and what SMSF trustees must do differently from everyone else.
What is the difference between accumulation phase and retirement phase in superannuation?
In the accumulation phase, investment earnings inside a super fund are taxed at up to 15%. In retirement phase — once a member commences an account-based pension after meeting a condition of release — those same earnings become tax-free (ATO, 2026). That single change, from 15% tax to 0% on the earnings a super fund generates, is the entire financial case for transitioning as soon as eligible. Eligible members who remain in accumulation phase continue to pay earnings tax that retirement phase would eliminate.
The mechanics are worth understanding clearly. In accumulation phase, a super fund receives contributions, invests them, and pays tax on the investment earnings each year. In retirement phase, a member commences an account-based pension — the balance remains invested inside the super system, but the earnings on assets supporting that pension are exempt from tax. The member draws a regular income from the account, which counts toward income for Age Pension purposes, but the earnings themselves no longer attract tax (ATO, 2026).
There is one distinction that is widely misunderstood and worth stating directly. A Transition to Retirement (TTR) pension — available from age 60 while still working — does not achieve tax-free earnings. Since 1 July 2017, TTR earnings have been taxed at 15%, the same rate as accumulation phase. The 0% tax benefit only applies in full retirement phase, which requires meeting a full condition of release. The most common condition is genuinely ceasing employment after age 60 with no intention of returning to 10 or more hours per week. The ATO applies a specific test to determine whether retirement is genuine — members winding down work gradually, taking a career break, or planning a future return to work should seek professional advice before treating themselves as having met this condition (ATO, 2026). At age 65, the condition is met unconditionally, regardless of employment status (ATO, 2026).
One further point on scale: the Transfer Balance Cap — the lifetime limit on how much can be transferred into the tax-exempt retirement phase — rises to $2.1 million from 1 July 2026 (ATO, 2026). For most Australians, this cap is not a practical constraint. The median super balance for Australians aged 60 to 64 is approximately $220,500 (ATO Taxation Statistics 2022–23). For the overwhelming majority of people eligible to transition, the cap is not a factor.
How much does staying in accumulation phase cost in tax — in actual dollars?
On a $400,000 super balance earning 7% per year — as the table below illustrates — staying in accumulation phase costs approximately $4,200 per year in earnings tax that a retirement phase account would eliminate. On $500,000, that figure rises to $5,250 per year. HESTA's research, prepared by Laneway Analytics, found that delaying the switch by four years results in up to 12% less total retirement income compared to members who transition at eligibility — and the median duration HESTA's eligible members wait before switching is precisely four years (HESTA and Laneway Analytics, 2026).
The table below shows the annual tax cost of remaining in accumulation phase at different balance levels:
Super balance | Assumed return (7% p.a.) | Annual earnings | Tax at 15% | Annual cost of staying in accumulation |
$200,000 | 7% | $14,000 | 15% | ~$2,100 |
$300,000 | 7% | $21,000 | 15% | ~$3,150 |
$400,000 | 7% | $28,000 | 15% | ~$4,200 |
$500,000 | 7% | $35,000 | 15% | ~$5,250 |
$600,000 | 7% | $42,000 | 15% | ~$6,300 |
Illustrative only. Assumes 7% annual investment return and full 15% earnings tax on accumulation balance. Actual returns, fund fees, and individual tax treatment vary. Retirement phase earnings are tax-free subject to the Transfer Balance Cap (ATO, 2026). This is general information, not personal advice.
The table shows the annual cost at a point in time. The actual cost of a four-year delay is materially higher once the compounding of lost tax-free growth is included — which is precisely what HESTA's 12% total retirement income finding captures (HESTA and Laneway Analytics, 2026). By 2030, HESTA projects that approximately 3 million Australians will be forgoing a combined $5.5 billion per year if current behaviour does not change (HESTA and Laneway Analytics, 2026).
Who is most affected by the retirement phase take-up gap — and does balance size matter?
Only 45% of eligible Australians in APRA-regulated super funds have transitioned to a retirement phase product, according to HESTA's research citing APRA data. Among HESTA's own eligible members, the take-up rate is 30%. Women are the most underserved demographic: HESTA's female member take-up rate is 29% — despite women often standing to gain the most from the tax-free earnings transition, particularly given that they typically retire with lower balances and have fewer years of compounding ahead (HESTA and Laneway Analytics, 2026).
In HESTA's modelling of their eligible member cohort, every group analysed — regardless of balance size, gender, homeownership, or marital status — was better off transitioning to retirement phase at eligibility (HESTA and Laneway Analytics, 2026).
The data on balance size is particularly instructive. Members with balances under $50,000 have a take-up rate of just 15% — among the lowest of any group — despite being precisely the cohort for whom every tax-free dollar matters most. At the other end of the spectrum, members with balances over $500,000 still show only a 55% take-up rate (HESTA and Laneway Analytics, 2026). The inertia problem is not a function of financial sophistication or balance size. It is a function of the system's default position.
In FY2025, HESTA's own 83,000 eligible members who had not transitioned collectively missed $69 million in tax-free earnings in a single year (HESTA and Laneway Analytics, 2026). Debby Blakey, HESTA's chief executive, has been direct about where the burden falls hardest: "Women who have spent their careers caring for others often retire with more modest balances — and they are precisely the members least likely to make this transition on their own."
The gap between men and women compounds this picture. At ages 60 to 64, the median male super balance is $219,773 against $163,218 for women — a gap of more than $56,000 at the point where the decision to transition carries the most financial weight (ATO Taxation Statistics 2022–23).
Key considerations before switching superannuation to retirement phase
The following are among the most common aspects members address before switching superannuation to retirement phase. Individual circumstances vary — a qualified professional can confirm what applies to a specific situation.
Whether a full condition of release has been met
What insurance cover is held through the accumulation account
Whether ongoing contributions are still expected
How the transition affects Age Pension entitlement
Of these, the most commonly overlooked is the second. Life insurance, TPD cover, and income protection held through an accumulation account does not automatically transfer to a retirement phase pension account — and for some members, it ceases entirely at the point of transition (MoneySmart, 2026; Wealthlab, 2026).
1. Whether a full condition of release has been met
The full retirement phase — with its 0% earnings tax — requires meeting a full condition of release, not just reaching a certain age. The most common condition is reaching preservation age (60 for all Australians in 2026) and genuinely ceasing employment with no intention of returning to 10 or more hours per week. At age 65, the condition is met unconditionally. Beginning a TTR pension at 60 while still working does not qualify for full retirement phase and will not achieve tax-free earnings (ATO, 2026).
2. What insurance cover is held through the accumulation account
This is among the most commonly missed considerations. Insurance underwritten through major industry fund group insurance arrangements — including providers such as TAL, AIA, and MetLife — is attached to the accumulation account. It does not automatically follow the member into a retirement phase pension account. Before initiating the transition, members should confirm with their super fund what happens to any life, TPD, or income protection cover. In some structures, cover ceases when the accumulation account closes. In others, a separate election is required to continue it.
Christopher Hall, AdvDipFP, Authorised Representative, AFSL 526688, notes that confirming the status of insurance cover before transitioning is among the most frequently raised issues across the life insurance policy reviews he has conducted for Australian families.
A broader insurance premium review is often a practical first step — covering what existing cover looks like and whether it remains appropriate at this stage of life. A licensed life insurance adviser can confirm whether the policy structure needs to change before the transition proceeds.
3. Whether ongoing contributions are still expected
Superannuation contributions — employer SG, salary sacrifice, and personal contributions — can only be received into an accumulation account. If contributions will continue to arrive (for example, from part-time work), a separate accumulation account should remain open alongside the retirement phase pension account. The two can coexist (ATO, 2026).
4. How the transition affects Age Pension entitlement
Account-based pension assets are assessed under both the assets test and income test for Age Pension purposes. Transitioning to retirement phase does not reduce the value of a member's assets — it changes the structure through which they are held. For those near the means-testing thresholds, the transition may affect Age Pension entitlement. The full Age Pension is available to single homeowners with assessable assets below $321,500 and couples below $470,000 (Services Australia, 2026). Specific advice from a licensed financial adviser is appropriate before making this decision.
Common mistakes to avoid:
Starting a TTR pension and assuming earnings are now tax-free is the most frequent misunderstanding — they are not, until a full condition of release is met. Failing to check insurance cover before the accumulation account closes is the most consequential. Not keeping an accumulation account open when ongoing employer contributions are expected is also a common structural error. And assuming the transition is only worth doing at large balance levels — the illustrative tax savings in the table above show that even a $200,000 balance could save approximately $2,100 per year in earnings tax on the 7% return assumption used.
Separately, it is worth confirming whether life insurance held inside a super fund is adequate before any structural changes are made — this is a question that often surfaces during the transition process.
Why do SMSF trustees face different obligations when transitioning to retirement phase?
For self-managed super fund trustees, the transition from accumulation to retirement phase is not a passive process — it is an active trustee decision with formal obligations that members of APRA-regulated funds do not face. There is no fund to prompt the trustee, no automatic default, and no safety net if the process is managed incorrectly. Failure to meet the ongoing minimum pension payment requirement causes the income stream to be treated as having ceased from the start of that financial year — losing the entire year's tax-exempt earnings status, not just the missed payment (ATO, 2026).
To commence an account-based pension inside an SMSF, the trustee must pass a formal trustee resolution documenting the decision to commence a pension, create a pension agreement, and establish the payment amount above the mandatory minimum. This documentation is not optional — it is a compliance requirement under the Superannuation Industry (Supervision) Regulations 1994 (Cth).
Once the pension commences, the minimum annual drawdown must be paid in full before 30 June each year. For an SMSF member under 65, that minimum is 4% of the account balance as at 1 July. The rates increase progressively with age:
Age | Minimum annual drawdown |
Under 65 | 4% |
65–74 | 5% |
75–79 | 6% |
80–84 | 7% |
85–89 | 9% |
90–94 | 11% |
95+ | 14% |
Source: ATO, 2026.
Where an SMSF has both accumulation and pension members in the same financial year, an actuarial certificate may be required to calculate the proportion of fund income that is exempt from tax. This adds a layer of complexity that does not apply to APRA fund members (ATO, 2026).
The insurance consideration in point 2 above is equally relevant to SMSF members. Life insurance, TPD cover, or income protection held through the SMSF's accumulation balance is a separate consideration from the pension account. Trustees should confirm the status of any insurance arrangements before commencing the pension.
A full guide to SMSF insurance obligations and the broader trustee requirements at retirement is covered in the SMSF Life Insurance in Australia guide. SMSF trustees should also review what the ATO expects trustees to do when it comes to formally considering and documenting insurance inside the fund.
Frequently asked questions
What is the difference between accumulation phase and retirement phase in superannuation?
In accumulation phase, a super fund's investment earnings are taxed at up to 15% each year. In retirement phase, once a member meets a condition of release and commences an account-based pension, the earnings on assets supporting that pension become tax-free. This shift from 15% to 0% tax on earnings is the primary financial reason to transition as soon as eligible. The switch is not automatic — members must actively initiate it (ATO, 2026).
Is the Transition to Retirement (TTR) pension the same as retirement phase?
No — and this distinction matters significantly. A TTR pension is available from age 60 while still working, but TTR earnings remain taxed at 15%, the same rate as the accumulation phase. The 0% tax-free earnings benefit only applies in full retirement phase, which requires a full condition of release — most commonly, genuinely retiring after age 60 or reaching age 65. Since 1 July 2017, TTR earnings have no longer been tax-exempt (ATO, 2026). Starting a TTR pension does not reduce the fund's earnings tax.
When can I switch my super to retirement phase?
Full retirement phase access — including tax-free earnings — requires reaching the member's preservation age (60 for all Australians in 2026) and meeting a condition of release. The most common condition is genuinely ceasing employment with no intention of returning for 10 or more hours per week. At age 65, access is unconditional regardless of employment status. Turning 60 while still working qualifies for TTR only — not full retirement phase (ATO, 2026).
How much tax do I save by switching super to retirement phase?
The saving depends on balance size and investment return. On a $400,000 balance earning 7% per year — as the illustrative table in this article shows — the annual tax saving is approximately $4,200. On $500,000, the figure is approximately $5,250 per year. HESTA's research, prepared by Laneway Analytics, found that delaying the transition by four years results in up to 12% less total retirement income compared to members who switch at eligibility, once the compounding effect of lost tax-free growth is included (HESTA and Laneway Analytics, 2026).
What is an account-based pension and how does it work?
An account-based pension is a retirement income product through which a member draws regular income from their superannuation after meeting a condition of release. The balance remains invested inside the super system. In full retirement phase, investment earnings on those assets are tax-free. A minimum annual drawdown applies — starting at 4% of account balance for those under 65 — and there is no maximum withdrawal amount. The account continues until the balance is exhausted or the member passes away (ATO, 2026; MoneySmart, 2026).
How do I actually start an account-based pension in Australia?
For members of APRA-regulated super funds (industry or retail funds), the first step is to contact the super fund directly. Most funds have an online application or pension commencement form — the member will need to confirm a condition of release has been met and nominate an income payment amount above the minimum. For SMSF trustees, a formal trustee resolution is required alongside documentation of the pension commencement and ongoing compliance with minimum drawdown requirements (ATO, 2026).
What happens to my life insurance when I switch to retirement phase?
Insurance held through a superannuation accumulation account — including life cover, TPD, and income protection — does not automatically transfer when a member switches to retirement phase. Depending on the fund, cover may cease, change, or require a separate election to continue. This is one of the most frequently overlooked issues at the point of transition, and one where confirming cover status with the super fund before initiating the switch is essential (MoneySmart, 2026; Wealthlab, 2026).
Can I still work after switching to retirement phase?
From age 65, members can work and hold retirement phase benefits simultaneously with no restrictions. Between ages 60 and 64, full retirement phase requires the member to have genuinely ceased employment. If a member retires and later returns to work, the already-transitioned super remains in retirement phase. New contributions from the new employer go into a separate accumulation account. In most circumstances, super already drawn as pension income cannot be returned to super — individual eligibility to make further contributions depends on age, work test status, and contribution caps; a qualified adviser can confirm what applies to a specific situation (ATO, 2026).
Key takeaways
Since 2017, eligible Australians have collectively forgone $13.5 billion in tax-free super earnings by not switching to retirement phase at eligibility. In FY2025 alone, 1.8 million eligible Australians collectively missed $2.5 billion (HESTA and Laneway Analytics, 2026).
Investment earnings in accumulation are taxed at up to 15%. In full retirement phase, they are tax-free. On a $400,000 balance earning 7% per year, the annual difference is approximately $4,200 — on the illustrative 7% return assumption in the table above.
In HESTA's research, a four-year delay in transitioning reduced total retirement income by up to 12% among the member cohort analysed — and the median delay among HESTA's eligible members was four years (HESTA and Laneway Analytics, 2026).
Life insurance, TPD cover, and income protection held through a super accumulation account does not automatically transfer to a retirement phase pension account. Confirming cover status before transitioning is a step frequently overlooked — and one with material consequences for members who hold insurance through their accumulation account (MoneySmart, 2026).
SMSF trustees must actively commence a pension through a formal trustee resolution and pay the minimum annual pension amount in full each year. Failure to do so removes the fund's tax-exempt status for the entire year (ATO, 2026).
See if you're eligible for a complimentary review
Policyholders holding life insurance, TPD cover, or income protection through a superannuation accumulation account — and approaching the age of retirement phase eligibility — may find it valuable to understand what happens to that cover before making the transition. Christopher Hall reviews existing insurance policies for eligible clients at no cost. Eligibility criteria apply — not all enquiries will proceed to a review.
For ongoing updates on how Australia's retirement system is evolving — including HESTA's proposed default transition mechanism and other regulatory changes affecting super fund members — the Australian Life Insurance Industry News hub covers these developments as they occur.
Related reading
How much super do I need to retire comfortably in Australia? — retirement adequacy targets, ASFA and SCA figures, income gap calculations
Life insurance inside super — is your default cover actually enough? — what default cover looks like before transition
SMSF Life Insurance in Australia — the complete guide — SMSF pension commencement, trustee insurance obligations
External resources:
About the author
Christopher Hall is a financial adviser and Principal of Arrow Equities, based in Rose Bay, Sydney. He holds an Advanced Diploma of Financial Planning (AdvDipFP) and is an Authorised Representative under AFSL 526688, through Rose Bay Equities Pty Ltd (ABN 87 645 284 680).
Christopher has conducted more than 500 life insurance policy reviews for Australian families. His work regularly involves reviewing how insurance held through superannuation interacts with accumulation and retirement phase structures — including what happens to cover when clients approach the point of retirement phase transition.
Last updated: May 2026. Transfer Balance Cap, minimum drawdown rates, Age Pension thresholds, and regulatory proposals are subject to government review. Readers should confirm current figures directly with the ATO, Services Australia, and their super fund.
Educational Disclaimer: This content is for educational purposes only and does not constitute financial advice. Past performance is no guarantee of future results.
The information, opinions and other materials appearing on the Web Site are of a general nature only and shall not be construed as advice. Arrow Equities, AFSL 526688, ABN 87 645 284 680. This general information is educational only and not financial advice, recommendation, forecast or solicitation. Rose Bay Equities accepts no responsibility for the accuracy or completeness of the information, opinions or other materials provided on or accessible through the Web Site. The Web Site has not been prepared with reference to your individual financial or personal circumstances. You should not rely on any advice in this Web Site without first seeking appropriate professional, financial and legal advice. Further, where Rose Bay Equities makes third party material available or accessible through the Web Site you acknowledge that Rose Bay Equities is a distributor and not a publisher of that content and that its editorial control is limited to the selection of those materials to make available. We accept no liability for any loss or damages arising from use.
References
Australian Taxation Office (ATO) 2024, Super account balances by age and gender, ATO, Canberra, extracted May 2026, <https://www.ato.gov.au/about-ato/research-and-statistics/in-detail/super-statistics/super-accounts-data/>.
Australian Taxation Office (ATO) 2026, Income stream (pension) rules and payments, ATO, Canberra, viewed May 2026, <https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/paying-smsf-benefits/income-stream-pension-rules-and-payments>.
Australian Taxation Office (ATO) 2026, Key superannuation rates and thresholds, ATO, Canberra, viewed May 2026, <https://www.ato.gov.au/tax-rates-and-codes/key-superannuation-rates-and-thresholds/payments-from-super>.
Australian Taxation Office (ATO) 2026, Retirement withdrawal — lump sum or income stream, ATO, Canberra, viewed May 2026, <https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/withdrawing-and-using-your-super/retirement-withdrawal-lump-sum-or-income-stream>.
Blakey, D 2026, 'Make the move: guiding members to tax-free retirement — CEO statement', HESTA Whitepaper, HESTA Super Fund, Melbourne, March 2026.
HESTA Super Fund and Laneway Analytics 2026, Make the move: guiding members to tax-free retirement, HESTA Super Fund, Melbourne, March 2026, viewed May 2026, <https://www.hesta.com.au/content/dam/hesta/Documents/hesta-white-paper-make-the-move-guiding-members-to-tax-free-retirement-2026.pdf>.
MoneySmart (Australian Securities and Investments Commission) 2026, Account-based pensions, ASIC MoneySmart, Canberra, viewed May 2026, <https://moneysmart.gov.au/retirement-income-sources/account-based-pensions>.
MoneySmart (Australian Securities and Investments Commission) 2026, Insurance through super, ASIC MoneySmart, Canberra, viewed May 2026, <https://moneysmart.gov.au/how-life-insurance-works/insurance-through-super>.
Services Australia 2026, How much Age Pension you can get, Australian Government, Canberra, rates effective March 2026, extracted May 2026, <https://www.servicesaustralia.gov.au/how-much-age-pension-you-can-get?context=22526>.
SuperReview 2026, 'Missed switching costs retirees $13.5bn: HESTA', Super Review, 31 March 2026, viewed May 2026, <https://www.superreview.com.au/missed-switching-costs-retirees-13-5bn-hesta/>.
Superannuation Industry (Supervision) Act 1993 (Cth), viewed May 2026, <https://www.legislation.gov.au/Details/C2022C00099>.
Superannuation Industry (Supervision) Regulations 1994 (Cth), viewed May 2026, <https://www.legislation.gov.au/Details/F2022C00766>.
Wealthlab 2026, 'Account-based pension Australia: how it works, rates and tax (2026)', Wealthlab, viewed May 2026, <https://wealthlab.com.au/account-based-pension-australia/>.
Wealthlab 2026, 'How to withdraw your super in Australia: rules, ages and tax explained (2026)', Wealthlab, May 2026, viewed May 2026, <https://wealthlab.com.au/how-to-withdraw-super-australia/>.
Comments