An SMSF has two phases. In accumulation phase, the fund is building wealth and its earnings are taxed at the concessional super rate of 15%. In pension phase (also called retirement phase), the fund is paying a retirement income to a member — and this is where the real tax advantage of super arrives: earnings on assets supporting a pension become tax-free, and capital gains on those assets are not taxed at all. Moving into pension phase is, for many trustees, the whole point of the years of accumulation.
This guide explains how to start an account-based pension in an SMSF, the minimum drawdown rules, the tax-free treatment, and the transfer balance cap you have to work within. It builds on the self-managed super fund pillar guide, and it is the bridge from your SMSF into retirement — read it alongside account-based pensions and set it inside a full retirement plan.
When can a pension start?
A member can start a pension once they meet a condition of release — most commonly reaching preservation age (now 60 for everyone born on or after 1 July 1964) and retiring, or turning 65 (at which point no work test applies). Until a genuine condition of release is met, benefits stay preserved and cannot be paid as a pension. If you want income before fully retiring, a transition to retirement pension is a separate, more limited option.
Starting an account-based pension in an SMSF
The most common SMSF pension is an account-based pension. To start one, the trustees:
- Confirm the condition of release and document it.
- Value the fund’s assets at market value on the day the pension commences — this fixes the starting balance.
- Decide the amount to move into pension phase, keeping within the member’s transfer balance cap (below).
- Document the pension — a pension commencement request, trustee minutes and updated records.
- Report the commencement to the ATO via transfer balance account reporting.
- Pay the pension from the fund’s bank account, at least meeting the minimum each year.
The member’s super stays invested; the pension is simply regular income drawn from their account, which continues to earn returns until it is exhausted.
Minimum drawdowns
An account-based pension must pay at least a minimum amount each financial year, set as a percentage of the account balance at 1 July (or at commencement in the first year, pro-rated). The percentage rises with age — starting around the low single digits for those in their 60s and stepping up in later life. Exact rates are set by regulation and can be temporarily varied by the government, so confirm the current minimum factors for each age band at ato.gov.au or Moneysmart.
Missing the minimum is a serious error: if the fund fails to pay at least the minimum in a year, the ATO may treat the pension as never having been in retirement phase for that year, meaning the fund loses the tax-free earnings treatment for that period. This is why liquidity — having enough cash to pay the pension — must be built into your investment strategy, especially for property-heavy funds.
The big advantage: tax-free earnings and nil CGT
Once assets support a retirement-phase pension:
- Investment earnings are tax-free — no 15% tax on income from those assets.
- Capital gains are tax-free — CGT is nil on assets sold while supporting a pension. (In accumulation phase, by contrast, a super fund gets a 33.3% CGT discount on assets held longer than 12 months, and gains are taxed at 15% less the discount.)
This nil-CGT outcome is a major planning lever: some trustees deliberately time the sale of an appreciated asset until the fund is in pension phase to eliminate the capital gains tax entirely. We cover the mechanics in CGT and SMSF/super.
Note that pension payments themselves are generally tax-free in the member’s hands from age 60.
The transfer balance cap
You cannot move unlimited amounts into the tax-free pension environment. The general transfer balance cap limits how much each member can transfer into retirement phase over their lifetime — it is $2.0m in 2025-26, rising to $2.1m in 2026-27 (indexed). Amounts above your personal cap must stay in accumulation phase (taxed at 15%) or be withdrawn.
Trustees must report pension commencements and certain other events through transfer balance account reporting so the ATO can track each member against their cap. Exceeding the cap triggers an excess transfer balance assessment.
Mixed funds and the exempt current pension income calculation
Where a fund has both pension and accumulation accounts, only the earnings on the pension-supporting portion are tax-free. Working out the exempt proportion (exempt current pension income, or ECPI) can require an actuarial certificate each year, which is an extra cost — see SMSF costs and fees. Funds that are wholly in pension phase for the full year often avoid this.
Very large balances: Division 296
From 1 July 2026, the new Division 296 tax applies an extra 15% on earnings for total super balances between $3m and $10m, and an extra 25% above $10m (thresholds indexed), assessed on a realised-earnings basis. The first assessment is for FY2026-27, payable from 1 July 2027. This does not change how a pension works, but members with very large balances should factor it into their planning — see Division 296: the $3 million super tax.
A simple worked illustration
Suppose a member turns 60, retires, and moves $600,000 into an account-based pension in their SMSF. If the minimum drawdown factor for their age is (say) 4%, they must draw at least $24,000 that first full year — but they can draw more if they need it. Meanwhile, the earnings on that $600,000, and any capital gains on the assets supporting it, are tax-free, and the pension payments land in the member’s hands tax-free from age 60. If the fund later sells a long-held share parcel while it is fully in pension phase, the capital gain is not taxed at all — the same sale in accumulation phase would have attracted 15% tax, reduced by the 33.3% super CGT discount. That contrast is why the move into pension phase is such a pivotal moment, and why timing asset sales around it can be so valuable. Always confirm the current minimum factors for the member’s age band, as they are set by regulation and can change.
Common pitfalls
- Starting a pension before a genuine condition of release is met.
- Failing to pay at least the minimum, losing the tax-free treatment for the year.
- A property-heavy fund without the cash to pay the pension.
- Ignoring the transfer balance cap and moving too much into pension phase.
- Forgetting transfer balance account reporting or the actuarial certificate where needed.
Pension phase is where an SMSF finally delivers its tax payoff. To plan the income side properly, read our guide to account-based pensions, consider how the age pension and other income fit in your retirement plan, and make sure your investment strategy keeps the fund liquid enough to pay you.
This article is general information only and not financial or tax advice; consider your own circumstances and speak to a licensed adviser or the ATO before acting.