What type of SMSF pension can I have and what are the rules for each

What types of SMSF pension are available?

These days, almost all SMSF pensions are a particular type known as an account-based pension.

There are two types of account-based pension:

• a "retirement phase" pension – this is a pension being paid to someone who has retired or met another condition that gives them full access to their super, and

• a "transition to retirement" pension – this is a pension that's being paid to someone who doesn't yet have full access to their super but is old enough to start a pension. Anyone is old enough to start one of these pensions when they reach their "preservation age" (which is 60 for most people) but they have some extra restrictions. They are discussed further below.

Features of all account-based pensions 

The main characteristics of an account-based pension are:   

No fixed term  

The pension finishes when your account runs out - i.e. once you've taken out all the money.   

Minimum annual pension payment  

You have to take at least a certain amount out of your pension account each financial year. The amount is a percentage of your pension account balance at the start of the financial year. The percentage goes up as you get older.

*Sometimes there are special reductions to these percentages. For example, they were halved during 2020/21, 2021/22 and 2022/23 as a special concession during the peak of the Covid-19 pandemic.  

Often people with large super balances only start a pension with some of their super. Their super then gets divided into two “accounts” behind the scenes in their SMSF – one is their pension and one is called an “accumulation account” (ie money that is still accumulating in the fund). The minimum payment amounts are based on your pension account only – not all of your super.

Adjustments are made if you start the pension during the year 

For example, if you start a pension in January, only around half of the full year’s payment has to be made and the calculation will be done based on your balance in January (i.e. when you start the pension), not the previous 1 July. In fact, if your pension starts as late as June, you do not need to make a payment in that first financial year at all.   

Can be stopped at any time

This is known as commuting, and return your benefit to a super accumulation account. You might do this if you no longer want to take so much income, for example, if you return to work. If you decide to do this, you have to pay your pension up-to-date first, for example, if you’re stopping your pension on 1 October, you would have to take roughly one quarter of the year’s minimum payments first.

Payments are tax free after age 60

All payments from account based pensions are tax free for anyone who is over 60 (and remember these pensions can’t usually start until you’re 60 anyway).

Can still make contributions

Starting a pension doesn’t prevent you from continuing to make contributions to the fund – these are just recorded separately in a new member account. You can’t simply add them to the pension once it is running.

Can allocate pension payments to continue to someone else when you die

You can set your pension to continue to someone else (such as a spouse) when you die. This is known as a ‘reversionary’ pension. Note that most people can only nominate their spouse as a reversionary beneficiary.

Special features of retirement phase pensions

Retirement phase pensions have all the characteristics of account-based pensions with some extra restrictions and benefits.

Limitations of account-based pensions

There's a limit - known as the transfer balance cap - on the total amount of super anyone can put into a retirement phase pension over their lifetime.  This amount changes from time to time (read our comprehensive guide to pensions here to understand more about how this limit works). The transfer balance cap doesn't apply to transition to retirement pensions.  

Extra benefits of retirement phase pensions

Special tax rules

As long as the pension meets all the rules, SMSFs that pay retirement phase pensions stop paying income tax on some or all of their investment income (not just rent, dividends, interest – also capital gains). The amount of income that’s exempt from tax is often worked out by an actuary but broadly speaking if (say) 70% of the SMSF relates to retirement phase pension accounts, 70% of the fund’s investment income will be exempt from tax.

In an SMSF, this tax break even includes capital gains built up over many years.

For example, Craig’s SMSF bought a property back in 2018. In 2026 Craig started a pension with all of his super. He’s the only member of the fund and hasn’t made any super contributions since. If the property is sold in (say) 2028, all of the capital gains will be exempt from tax even though they built up over many years (including before the pension started).

This tax treatment doesn’t apply to transition to retirement pensions.

Can pay lump sums out of your account

The fact that you’ve started taking a pension doesn’t prevent you from also having lump sums paid from your account (sometimes there are benefits to doing this).

Even if you take out lump sums, you still have to meet the minimum pension payment requirements. And the lump sums don’t count towards the amount you have to draw as a pension.

Special features of transition to retirement pensions

A transition to retirement pension allows you access to your super money without retiring as long as you’re over 60. Because you haven’t retired, there are some extra restrictions.

Limitations of transition to retirement pensions

A transition to retirement pension has three extra restrictions compared to retirement phase pensions:

• You can’t take more than 10% of your pension account balance out as a pension payment in any given financial year. In other words, these pensions have minimum and maximum pension payment rules.
• It's very rare to be allowed to take lump sums out of a transition to retirement pensions.
• Transition to retirement pensions don’t get the special tax exemption on the super fund’s investment income that’s available for retirement phase pensions. Because they don’t get this benefit, they’re also not subject to the transfer balance cap. A transition to retirement pension can be as large as you like.

When do these restrictions end?

As soon as you meet one of the conditions to get full access to your super (for example, retiring or turning 65), these limitations can stop applying and it will become just like a normal retirement phase account-based pension. Learn more about conditions of retirement here.

You may also be interested in...

• Starting a pension
• Unique SMSF strategies and opportunities

This article is for general information only. It does not constitute financial product advice and has been prepared without taking into account any individual's personal objectives, situation or needs. It is not intended to be a complete summary of the issues and should not be relied upon without seeking advice specific to your circumstances.