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Pension phase planning

Moving super from accumulation into pension (retirement) phase can be one of the biggest legitimate tax shifts in Australia — but only if it’s done properly. The planning is as much about documentation, cashflow and minimum payments as it is about “tax savings”.

What “pension phase” actually means

In most SMSF and super conversations, this means starting a retirement-phase income stream (often an account-based pension).

The tax idea in plain English

  • In accumulation, a complying fund’s taxable income is generally taxed at 15%.
  • In retirement phase, income earned on assets supporting retirement-phase income streams can be tax exempt (commonly called ECPI).
  • That difference is why pension phase planning matters.

Important: there are caps and conditions (e.g., eligibility/condition of release, transfer balance cap rules, minimum pension payments). These need to be checked for your situation.

What changes operationally

  • You must meet minimum pension payments each year (and sometimes pro-rata in the first year).
  • The fund needs good valuations and clean records of when the pension commenced.
  • If the SMSF has both accumulation and pension interests, an actuarial certificate may be needed to support the exempt income calculation.
Tell it like it is: most pension-phase “stuff-ups” happen because the paperwork and minimum payments aren’t handled properly.

Quick tax-saving examples

These are simplified examples to show the magnitude of the difference. Real outcomes depend on your fund’s exact facts.
Scenario Accumulation (taxed) Retirement phase (ECPI) Indicative saving
Example 1: Investment earningsFund earns $50,000 in interest/dividends/rent (net taxable income, ignoring offsets/credits). 15% × $50,000 = $7,500 0% × $50,000 = $0 $7,500
Example 2: Capital gain (held > 12 months)Fund sells an asset and realises a $100,000 capital gain (eligible for the SMSF CGT discount). Effective ~10% × $100,000 = $10,000(15% tax rate with a 1/3 CGT discount) 0% × $100,000 = $0(where the asset is supporting retirement-phase income stream) $10,000
Example 3: Mixed fund (some pension, some accumulation)Fund earns $80,000 and an actuary calculates 60% exempt. 15% × $80,000 = $12,000 Taxable portion = 40% × $80,000 = $32,000
15% × $32,000 = $4,800		 $7,200
The point: once a meaningful balance is in retirement phase, the tax savings can be material — but only if the fund qualifies and the admin is done properly.

Common pitfalls (and how to avoid them)

These are the things that create ATO/audit headaches and can wipe out the intended benefit.

Pitfalls we see often

  • Minimum pension payments not met by 30 June (or not tracked properly across multiple pensions).
  • Pension commencement is not documented (no trustee resolution, no start date evidence, poor valuations).
  • Liquidity not considered (fund holds illiquid assets but still must pay minimum pension amounts).
  • Mixed accumulation and pension interests but no actuarial certificate / incorrect exempt percentage method.
  • Trying to “fix it later” after year-end — often too late, and expensive to unwind.

Best practice approach

  • Plan early (well before 30 June) and decide: start date, pension type, and cashflow.
  • Minute trustee decisions (commencement, balances, investment strategy review, payment schedule).
  • Set a payment plan (monthly/quarterly) so the minimum is met without a last-minute scramble.
  • Keep valuations and supporting evidence at year-end (especially for property/unlisted assets).
  • If mixed interests exist, factor in actuarial requirements and ECPI method selection.
Why minimum pension payments matter so much
The tax exemption relies on the pension being valid. Missing the minimum payment can put the pension treatment at risk for that year. Avoid the “June panic payment” by scheduling payments through the year.

Pension phase planning checklist

A straightforward, trustee-friendly list to work through.

Before starting the pension

When starting (paperwork and set-up)

If your SMSF holds property or other illiquid assets, pension phase planning is mostly about liquidity and timing — not just tax.

Case studies (good and bad)

Same concept. Different execution. Big difference in outcomes and stress.
Best practiceGood case study: “Planned payments, clean exemption”

A member retires and the SMSF commences an account-based pension early in the year. Trustees document the start properly and set quarterly payments. The fund earns $60,000 during the year on assets supporting the pension.

In accumulation, that income could mean around $9,000 of fund tax (15%). In pension phase, the income is potentially exempt (subject to the fund’s facts), and the minimum pension is met without a last-minute rush.

Outcome: smoother audit, predictable cashflow, and the intended tax outcome is actually achieved.

Avoid thisBad case study: “Started pension… but missed the minimum”

Trustees start a pension but don’t track payments. By late June they realise the minimum has not been met. Payments are rushed, bank processing delays occur, and the documentation is incomplete.

The auditor raises queries and the fund risks losing the intended pension treatment for the year, which can wipe out the expected tax benefit and add extra cost to fix.

Outcome: stress, delays, and the “tax saving” can disappear due to admin failures.

Investment strategy and pension phase are linked: the ATO expects trustees to consider diversification, liquidity and risk. If your holdings are concentrated, the strategy should clearly explain why and how risks are managed.

ATO resources and official guidance

If you want to read the source guidance, these are good starting points.

General information only. This reminder-style page is not legal, tax or financial advice and does not consider your specific circumstances. We recommend tailored advice before starting pensions, especially for SMSFs with property, borrowings, or mixed member stages.

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