SMSF Pensions Phase

There are two types of SMSF pensions:

1. Account-based pension
2. Transition to retirement pension

When an SMSF Member reaches preservation age (currently between age of 55 to 60, depending on the year he/she was born), the Member may commence a transition to retirement income stream. You can start a transition to retirement income stream in your SMSF whilst still being employed.
When you are retired, you can commence an account-based pension.

A transition to retirement income stream pays benefits before retirement. An account-based pension pays benefits after retirement.

Transition to retirement

A transition to retirement pension allows you to receive your SMSF benefits as an income stream whilst you are still working provided that you reach preservation age.

A pension account is created from the monies accumulated in the SMSF. Investment earnings are added to the account and pension payments are deducted from the account until the account balance is fully paid out (fully commuted).

Pension Commutation

A Commutation involves converting part or all of a Pension into an immediate lump sum payment. Before a Pension Account is rolled over, its current balance is withdrawn as a lump sum, paid to the Trustee, and then transferred into an Accumulation Account.

When commuting a Pension, keep the following in mind:

• Partial commutations no longer count towards the required minimum annual Pension payment.

• For full commutations, ensure that the minimum Pension payment has been made before proceeding.

• For partial Commutations, ensure either the minimum payment has been made beforehand or that enough assets remain to satisfy the minimum Pension payment requirements for the year, based on the original income stream value at the start of the year.

• The obligation to make a minimum payment before commutation does not apply if:

  • The commutation is due to the death of a member

  • The commutation is solely to pay a Division 293 additional tax

  • The commutation is to facilitate a payment split under family law provisions

  • The commutation is made to allow a client to return a financial product under the corporation’s law provisions.

Another reason you would do a Commutation is to lower your Transfer Balance Cap, which is currently at $2.1 million (effective on 1 July 2026). 

Account-based pension (post-retirement)

An account based pension is a way of receiving your superannuation benefits as an income stream, instead of a lump sum, after you have reached your preservation age and permanently retired or have satisfied another condition of release.

The pension account is converted from the monies accumulated in the SMSF. Investment earnings are added to the account and pension payments are deducted from the account until the account balance is fully paid out.

Taxation of benefits in pension phase

When you convert your superannuation to a pension, there is no tax payable. From 1 July 2017, the earnings from the capital that support the Transition to retirement pension are taxed at 15% while those generated from account based pension are tax-free.

Member over the age of 60

To receive an Account Based Pension, a Member must be:
1. 60 + and retired or
2. 65+ (can still work)
Pension payments and any lump sum withdrawal are tax-free. The Trustee is not required to report the pension payment to the Australian Taxation Office (you are not required to include these payments in your income tax return).

Member under the age of 60

Part of your pension payment may be tax free (tax-free component, generally consisting of after-tax money or non-concessional personal contributions), and the balance will be taxable. The taxable component of your pension payments are taxed at your marginal rate plus Medicare levy. You will also be eligible for a 15% tax offset.

Minutes for an SMSF Pensions Commencement

To start a pension, the Trustees have to minute this decision. Download this sample minutes to start your pension (just add your own SMSF details in).

FAQs on SMSF Pensions