Once an SMSF member meets a condition of release — such as reaching preservation age and retiring, or turning 65 — they can convert their accumulation savings into an account-based pension, up to a lifetime cap of $2.1 million (the Transfer Balance Cap from 1 July 2026), after which investment earnings on the pension assets become completely tax-free.
Moving from accumulation to pension phase takes the tax rate on investment earnings from 15% down to 0% — but only on assets up to your personal $2.1 million Transfer Balance Cap. Everything above that must stay in accumulation phase (still taxed at 15%) or be withdrawn.
What Is Pension Phase?
Superannuation exists in one of two phases: accumulation phase, where contributions and investment earnings build up your balance and earnings are taxed at up to 15%, and pension phase (also called retirement phase), where the fund pays you a regular income stream and earnings on the assets supporting that income stream are tax-free.
To start an account-based pension from an SMSF, a member must satisfy a condition of release under superannuation law. The most common triggers are reaching your preservation age and permanently retiring, ceasing an employment arrangement after age 60, or simply turning 65 (which is an unconditional release regardless of work status). Once that condition is met, the trustees can commence a pension by converting some or all of the member's accumulation balance into a pension account, from which minimum annual payments must then be drawn.
The Transfer Balance Cap Explained
The Transfer Balance Cap (TBC) limits how much super any individual can ever move into the tax-free pension phase over their lifetime. As of 1 July 2026, the general Transfer Balance Cap is $2.1 million, up from $2 million previously — it's indexed periodically in $100,000 increments in line with the Consumer Price Index.
Every member has their own personal transfer balance account that tracks credits (amounts moved into pension phase) and debits (amounts commuted back out). If your accumulation balance exceeds your available cap space, the excess simply remains in accumulation phase, where it continues to be taxed at up to 15% on earnings, or it can be withdrawn from super entirely if you've met a condition of release that allows a lump sum.
It's important to note the TBC is applied per individual, not per fund and not per couple — a couple running a two-member SMSF each have their own separate $2.1 million cap, giving a combined household capacity of $4.2 million in tax-free pension assets.
The Tax Benefit of Pension Phase
The core reason pension phase matters so much for SMSF trustees is tax. In accumulation phase, investment earnings — including realised capital gains — inside the fund are taxed at up to 15% (with a discount for assets held over 12 months, effectively around 10% on those gains). Once assets are re-classified as supporting an account-based pension in retirement phase, those same earnings become entirely tax-free to the fund.
This applies to dividends, interest, rental income, and capital gains alike. For a fund holding, say, an investment property or a share portfolio that has appreciated significantly, the difference between selling in accumulation phase versus pension phase can be substantial — potentially tens of thousands of dollars in tax on a single asset sale.
Minimum Drawdown Rates by Age
In exchange for the tax-free treatment, pension phase comes with a rule: trustees must pay members at least a minimum percentage of their pension account balance each financial year. There's no maximum for account-based pensions (other than what's left in the account) — only a minimum. The percentage increases as the member ages, reflecting a shorter expected drawdown period.
| Age | Minimum Annual Drawdown |
|---|---|
| Under 65 | 4% |
| 65–74 | 5% |
| 75–79 | 6% |
| 80–84 | 7% |
| 85–89 | 9% |
| 90–94 | 11% |
| 95+ | 14% |
The minimum is calculated as a percentage of the pension account balance, generally as at 1 July each year (or as at the commencement date, pro-rated, for pensions started partway through the year). Minimum pension payments must generally be made in cash — not as in-specie transfers of assets — and must be paid to the member before 30 June each financial year. Missing the minimum can cause the pension to fail retrospectively for tax purposes, meaning the fund loses the tax-exempt treatment on that pension's earnings for the whole year.
What Happens If You Exceed the Transfer Balance Cap
If a member's transfer balance account exceeds their personal $2.1 million cap — whether through a large initial transfer, or notional earnings on excess amounts — the ATO issues an excess transfer balance determination. The trustee must then commute (remove) the excess back into accumulation phase, or the member must withdraw it from the super system altogether if eligible.
On top of that, excess transfer balance tax applies to the notional earnings that accrued on the excess amount while it sat in pension phase. This tax is charged at 15% for a first breach and 30% for subsequent breaches. Because the cap is tracked at the individual level across all of a member's pension accounts (SMSF and any other funds combined), it's a common trap for members with pensions running in more than one fund.
Transition to Retirement (TTR) Pensions
Members who have reached their preservation age but are still working can start a Transition to Retirement (TTR) pension without needing to fully retire. This lets them draw a limited income stream (capped at 10% of the balance per year, with the same minimums above applying too) while continuing to work and contribute.
The key catch: earnings on assets supporting a TTR pension are not tax-free the way a standard account-based (retirement phase) pension is — they're still taxed at up to 15%, the same as accumulation phase. The tax exemption only kicks in once the member either declares they've permanently retired (or met another full condition of release) or turns 65, at which point the TTR pension automatically converts to a standard retirement-phase pension and the earnings become tax-free.
Practical SMSF Considerations
Running pension phase inside an SMSF (rather than an APRA-regulated fund) puts extra responsibility on trustees. A few things to plan for:
- Liquidity: the fund needs enough cash or readily saleable assets to meet minimum pension payments each year, particularly for older members on higher drawdown percentages — this matters a lot for funds holding illiquid assets like direct property
- Actuarial certificates: if the fund has both accumulation and pension members (or a member with both an accumulation and a pension interest) and doesn't use fully segregated assets for each, an actuary must certify the proportion of the fund's earnings that are tax-exempt each year
- Segregated vs unsegregated assets: trustees can choose to segregate specific assets as solely supporting a pension (their earnings are automatically tax-free) or use the unsegregated/proportional method with an actuarial certificate — the right choice depends on the fund's asset mix and member balances
- Annual review: pension phase strategy — including whether a member is at risk of breaching the Transfer Balance Cap through investment growth — should be reviewed at least once a year alongside the fund's investment strategy
Getting pension phase administration wrong is one of the more common SMSF compliance failures picked up at audit, particularly missed minimum payments and unsegregated funds operating without a current actuarial certificate. See our SMSF compliance checklist for the full annual obligation list.
Frequently Asked Questions
What is the Transfer Balance Cap in 2026?
The Transfer Balance Cap is $2.1 million as of 1 July 2026 — the maximum an individual can move from accumulation into tax-free pension phase over their lifetime.
What is the minimum pension drawdown rate for an SMSF?
Minimum rates by age are: under 65 = 4%, 65–74 = 5%, 75–79 = 6%, 80–84 = 7%, 85–89 = 9%, 90–94 = 11%, 95+ = 14% of the pension balance.
Is investment income tax-free in SMSF pension phase?
Yes — earnings and capital gains on assets supporting a retirement-phase account-based pension are tax-free, versus up to 15% in accumulation phase.
What happens if I exceed the Transfer Balance Cap?
You'll receive an ATO determination requiring you to commute the excess back to accumulation or withdraw it, and excess transfer balance tax applies to notional earnings on the excess.
Related Articles
- How to Wind Up an SMSF: Process, Costs & Timeline
- SMSF Compliance Checklist — What Trustees Must Do Each Year
- SMSF Death Benefits & Binding Nominations
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