Everything you do as an SMSF trustee — the contributions, the investment decisions, the annual compliance cycle — is building toward one outcome: a comfortable retirement. Pension phase is where that payoff happens. But transitioning your SMSF from accumulation to pension phase involves specific rules, formal trustee steps, and tax implications that matter enormously if you get them wrong.
This post covers when you can access your super, how pension phase works, and what the ATO requires when you make the switch.
What Is SMSF Pension Phase?
Every SMSF starts in accumulation phase — the period during which members contribute super, the fund invests, and earnings accumulate. Tax applies at 15% on contributions and fund earnings during this phase.
Pension phase begins when a member meets a condition of release and commences drawing an income stream from the fund. At that point, the tax treatment of the fund changes fundamentally — earnings on assets supporting the pension income stream drop to zero percent tax, up to the transfer balance cap.
The shift to pension phase is not automatic. Trustees must make a formal decision to commence a pension, execute the required documentation, and notify the ATO. Until those steps are taken, the fund remains in accumulation phase regardless of the member’s age.
When Can You Access Your SMSF? (Preservation Age Explained)
Access to your super is governed by conditions of release — specific circumstances under which the ATO permits members to draw on their preserved super benefits. The primary condition of release is reaching your preservation age and retiring.
Preservation age in Australia depends on your date of birth:
| Date of Birth | Preservation Age |
|---|---|
| Before 1 July 1960 | 55 |
| 1 July 1960 – 30 June 1961 | 56 |
| 1 July 1961 – 30 June 1962 | 57 |
| 1 July 1962 – 30 June 1963 | 58 |
| 1 July 1963 – 30 June 1964 | 59 |
| From 1 July 1964 | 60 |
For anyone born after 1 July 1964 — which covers most people currently in the workforce — the preservation age is 60.
Reaching preservation age alone is not enough. You must also meet the retirement condition, which under superannuation law means you have genuinely ceased employment and do not intend to return to work for 10 or more hours per week. Stopping work temporarily or taking leave does not satisfy this condition.
The exception is age 65 — at this point, you can access your super unconditionally, regardless of whether you are still working.
Can You Take Money Out of Your SMSF Before Retirement?
In most circumstances, no. The vast majority of super balances are classified as preserved benefits — meaning they cannot be accessed until a condition of release is met.
A small number of limited early access conditions exist:
- Terminal medical condition — two medical practitioners certify that the member is likely to die within 24 months
- Permanent incapacity — the member is permanently unable to work in any role for which they are reasonably qualified
- Severe financial hardship — specific eligibility criteria apply, and access is limited
- Compassionate grounds — ATO approval required for specific circumstances such as medical treatment costs or preventing foreclosure on a home
Illegal early release — accessing super outside these conditions — is treated seriously by the ATO. Penalties include the illegal payment being included in the member’s assessable income, significant tax consequences, and potential trustee disqualification. There is no compliant workaround for early access outside the permitted conditions.
Transition to Retirement (TTR) — Accessing Super Before Fully Retiring
If you have reached your preservation age but are not yet ready to retire fully, a Transition to Retirement (TTR) pension allows you to commence drawing an income stream from your SMSF while continuing to work.
Key rules for a TTR pension:
- Available once you reach preservation age, regardless of whether you have retired
- Payments must be taken as an income stream — lump sum withdrawals are not permitted under a TTR arrangement
- Minimum drawdown applies — at least 4% of the account balance per year (standard minimum pension rules)
- Maximum drawdown is capped at 10% of the account balance per year
- The fund’s TTR assets are not in full pension phase — earnings remain taxable at 15% until the member fully retires and converts to a full account-based pension
TTR pensions are most commonly used as a salary supplement strategy in the years leading up to full retirement, or to allow a gradual reduction in working hours without a sharp drop in income.
How to Commence a Pension in Your SMSF
Starting a pension in your SMSF requires formal trustee action — it does not happen automatically when you reach preservation age.
The process involves:
- Member lodges a written request to the fund to commence a pension, specifying the pension type and the amount to be transferred into pension phase
- Trustees pass a formal resolution to accept the pension request and commence the income stream
- Pension documentation is executed — a pension agreement setting out the terms of the pension, including payment frequency and amount
- Assets are allocated to pension phase — either through segregation (specific assets designated as pension assets) or the unsegregated method
- Transfer Balance Account Report (TBAR) lodged with the ATO — notifying the ATO of the transfer balance credit created when the pension commences
The TBAR lodgement is mandatory. It is how the ATO tracks each member’s usage of the transfer balance cap across all their super funds. Missing or late TBAR lodgements attract penalties and can create compliance issues that are complex to unwind.
The Transfer Balance Cap — Why It Matters
The transfer balance cap limits the total amount a member can transfer into pension phase across all their superannuation accounts. The current cap is $1.9 million (2025 financial year).
If a member’s total pension phase balance exceeds the cap:
- The excess must either remain in accumulation phase or be withdrawn from super entirely
- Excess transfer balance tax applies to notional earnings on the amount above the cap
- The ATO issues an excess transfer balance determination and the trustee must act within a specified timeframe
The transfer balance cap is an individual limit — not a fund limit. A member with balances across multiple super funds has a single cap that applies across all of them. This is why members approaching $1.9 million in super need careful planning before commencing any pension — the sequencing of transfers matters.
SMSF Minimum Pension Payments — What the Rules Require
Once a pension commences, the fund must pay a minimum pension amount each financial year. This is not optional — it is a legislative requirement. If the minimum is not paid in a given year, the fund loses its pension phase tax exemption for that entire year, and the fund’s earnings are taxed at 15% retrospectively.
Minimum pension percentages by age:
| Age | Minimum Annual Payment (% of balance) |
|---|---|
| Under 65 | 4% |
| 65–74 | 5% |
| 75–79 | 6% |
| 80–84 | 7% |
| 85–89 | 9% |
| 90–94 | 11% |
| 95 or older | 14% |
The balance used to calculate the minimum is the account balance at 1 July each year (or the commencement balance for the first year of the pension). There is no maximum payment for a standard account-based pension — members can draw as much as they choose above the minimum.
Does an SMSF Pay Capital Gains Tax in Pension Phase?
No — capital gains on assets supporting a pension income stream are exempt from tax in pension phase. This is one of the most significant tax advantages in the Australian superannuation system.
How the exemption is applied depends on the method the fund uses:
- Segregated method: Assets designated as pension assets are fully exempt. Capital gains on those assets attract zero tax.
- Unsegregated method: An actuary calculates the proportion of the fund’s income that is exempt, based on the ratio of pension to accumulation assets. An actuarial certificate is required each year.
The exemption applies up to the transfer balance cap. Earnings on assets above the cap remain taxable.
SMSF Pension Phase Tax — The Full Picture
The tax advantages of pension phase extend beyond capital gains:
- Fund earnings — interest, dividends, and rental income on pension phase assets are taxed at zero percent
- Franking credits — fully refunded to the fund in pension phase, representing a meaningful cash inflow for funds holding Australian shares
- Lump sum withdrawals — tax-free for members aged 60 and over; specific tax treatment applies for withdrawals between preservation age and 60
- Death benefits — paid to a tax dependant (such as a spouse) are generally tax-free; paid to a non-dependant (such as an adult child) may attract tax on the taxable component
Frequently Asked Questions
Can I access my SMSF at 60 and still work?
Yes — if you have reached 60 and genuinely retired from one employer, you can access the super benefits accrued with that employer even if you take up new employment elsewhere. From age 65, you can access super unconditionally regardless of employment status.
What is the minimum pension payment from an SMSF?
The minimum depends on your age — ranging from 4% of your account balance per year under age 65, up to 14% for members aged 95 or older. Failure to pay the minimum in any year causes the fund to lose its pension phase tax exemption for that year.
What happens if I exceed the transfer balance cap?
Excess transfer balance tax applies to notional earnings on the amount above the cap. The ATO will issue a determination requiring the excess to be removed from pension phase. Acting promptly on receiving a determination minimises the tax impact.
Do I need to notify the ATO when I start a pension?
Yes — a Transfer Balance Account Report (TBAR) must be lodged with the ATO when a pension commences. This is how the ATO tracks your usage of the transfer balance cap. Your accountant handles this as part of the annual compliance process.
Approaching Retirement With Your SMSF?
Pension phase is where the rules become most consequential — and where the cost of getting things wrong is highest. Commencing a pension correctly, staying within the transfer balance cap, meeting minimum payment obligations, and optimising the tax treatment of your fund’s assets all require careful, coordinated action.
At KSH TAX, we work with SMSF trustees at every stage of the fund’s life — including the transition into pension phase. If you’re approaching retirement and want to understand exactly what’s involved for your fund, start with a conversation.
ALSO READ:
SMSF Trustee: Roles, responsibilities, and what the ATO requires
SMSF Tax Return: Obligations, deadlines, and what the ATO requires every year
SMSF borrowing rules: How LRBAs work and what the ATO requires
