SMSF pension phase explained: how the 0% tax rate actually works (2026)

Pension phase — formally called 'retirement phase' in the SIS Act — is the single most valuable tax setting in the Australian super system. Once an SMSF member commences an account-based pension, the assets supporting that pension earn income and realise capital gains at a 0% tax rate. For a couple who can move the full $1.9 million per person into pension phase, that is $3.8 million of investments generating tax-free returns for the rest of their lives. Here is exactly how it works inside a self-managed super fund in 2026.

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When you can start a pension from your SMSF

To commence a retirement-phase pension, a member must have met a 'condition of release with a nil cashing restriction'. In practice that means one of: reaching age 65 (no other test required), retiring on or after preservation age (60 for anyone born after 1 July 1964), or permanent incapacity. A transition-to-retirement income stream (TRIS) can start from preservation age even while still working, but is NOT retirement-phase and earnings are still taxed at 15% until you retire or turn 65.

The Transfer Balance Cap — the $1.9M ceiling

The Transfer Balance Cap (TBC) is a lifetime limit on how much super each person can move into the 0% tax pension environment. In 2025–26 the general TBC is $1.9 million. Amounts above the cap must stay in accumulation phase and continue to be taxed at 15% on earnings. The cap is indexed in $100,000 increments to CPI, so it is likely to rise to $2.0 million within the next indexation cycle.

For a couple, the effective tax-free pension cap is $3.8 million — one of the most generous retirement tax settings in the OECD. This is why high-balance Australians typically move to an SMSF in the decade before and after retirement: it gives you full control over which assets support the pension, and therefore which assets get the 0% treatment.

Minimum pension drawdown rates for 2025–26 and 2026–27

Once a pension has commenced, the fund must pay the member a minimum percentage of their pension balance each financial year, calculated on the 1 July balance. The rates step up with age:

• Under 65 — 4%
• 65 to 74 — 5%
• 75 to 79 — 6%
• 80 to 84 — 7%
• 85 to 89 — 9%
• 90 to 94 — 11%
• 95 and over — 14%

Failing to pay the minimum by 30 June is one of the most common (and expensive) SMSF pension mistakes — the pension is treated as never having been in retirement phase for that entire year, and all earnings are reassessed at 15%. easySMSF checks pension drawdowns monthly and prompts trustees before year-end.

Segregated vs proportional (actuarial) method

Most SMSFs run 'mixed' — some balance in pension phase, some still in accumulation. There are two ways to allocate earnings between the two tax environments:

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• Segregated method — specific assets are formally set aside to support the pension. Their entire earnings and capital gains are 0% taxed; the accumulation assets sit separately and are taxed at 15%.
• Proportional (unsegregated) method — all fund assets are pooled, and an actuarial certificate determines the tax-exempt percentage of income for the year based on the average pension liability.

Since 1 July 2017, funds with any member holding more than $1.6M (now $1.9M) across all their super interests are effectively forced to use the proportional method — the ATO calls these 'disregarded small fund assets'. Get the classification wrong and the auditor will contravene the fund.

Capital gains inside pension phase — the biggest win

The pension-phase 0% rate applies to realised capital gains, not just income. That means selling shares, a managed fund, or even a direct property inside an SMSF that is fully in pension phase produces zero CGT. For a property held for 15 years with a $600,000 gain, this can be a saving of $150,000+ compared with holding the same property personally. See our detailed guide on how retirees are taxed on capital gains for the personal-vs-SMSF comparison.

Commutations, reversionary pensions and estate planning

Pension phase interacts closely with estate planning. A reversionary pension automatically continues to a nominated dependant (usually a spouse) on death, preserving the 0% tax environment for up to 12 months while the surviving spouse decides how to reshape the fund. A non-reversionary death benefit pension must be commenced within a strict timeframe or the balance is cashed out as a lump sum. Trustees should review reversionary nominations every time the deed is updated, a member turns 65, or a member starts a new pension.

Common pension-phase mistakes we see in first-year SMSF audits

• Missing the minimum drawdown by 30 June — entire year loses pension-phase status
• Assuming a TRIS is tax-free — it is not until the member retires or turns 65
• Not documenting the pension commencement with trustee minutes and a formal pension agreement
• Ignoring the TBC and reporting obligations (Transfer Balance Account Reports) — TBAR is due within 28 days of certain events
• Segregating a property that services members with more than $1.9M — the ATO now treats these as 'disregarded small fund assets' and forces the proportional method

General information only — not personal tax or financial advice. Speak to a registered tax agent or licensed financial adviser before commencing or restructuring a pension.

Sources: Australian Taxation Office — Starting a super income stream (pension); SIS Act 1993 sections 307-80 and 295-385; Income Tax Assessment Act 1997 Division 295; ATO — Transfer balance cap and TBAR reporting.