From 15% to zero: when (and how much) to turn your super into a pension

Your superannuation has two phases, and they are taxed very differently. While your money is in accumulation phase — where it sits while you are working and saving — the fund pays 15% tax on its investment earnings every year. But once you have retired and commenced an account-based pension, your super moves into retirement phase, where the earnings are taxed at 0% and the income you draw is tax-free from age 60 (ATO, https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/withdrawing-and-using-your-super/retirement-withdrawal-lump-sum-or-income-stream). That gap between 15% and zero, compounded across a retirement that might last decades, is one of the biggest tax breaks in the system. And yet a surprising number of retirees leave large sums sitting in accumulation for years — paying 15% on earnings they could be getting tax-free — for no reason other than that nobody told them to make the switch. Your super fund does not flip to retirement phase automatically; you have to actively start the pension. This article is about the decision and the mechanics: when you are allowed to commence, why you almost always should, how much you can move (there is a cap), what to do with anything above it, and how to time it.

What's a "condition of release", and why do you need one first?

You can only move super into the tax-free retirement phase once you have met a condition of release. The common ones are retiring after reaching your preservation age — now 60 for everyone born on or after 1 July 1964 — ceasing an employment arrangement on or after age 60, or simply turning 65, at which point you can access your super whether you have retired or not (ATO, https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/withdrawing-and-using-your-super/retirement-withdrawal-lump-sum-or-income-stream). If you have reached 60 but haven't retired, you can only run a transition-to-retirement (TTR) pension — and importantly, a TTR pension does not get the 0% earnings break until you meet a full condition of release; its earnings are still taxed at 15%. So the big tax win comes specifically from being in retirement phase, which needs a proper condition of release.

Why should you almost always commence a pension?

It comes down to that inertia trap. Because the fund won't switch by itself, retirees who don't act keep paying 15% on their earnings indefinitely. On a balance throwing off, say, $40,000 of earnings a year, that is around $6,000 a year going to tax that would be zero in retirement phase. For most people who have retired and are 60 or over, the right move is to commence an account-based pension up to the cap — and the question becomes "how much and when", not "whether". A common worry is that commencing locks the money away; it doesn't. An account-based pension still lets you take lump-sum withdrawals (called commutations) on top of your regular pension payments (MoneySmart, https://moneysmart.gov.au/retirement-income/account-based-pensions), so your money stays accessible.

How much of your super can you move?

How much you can move is limited by the transfer balance cap — a lifetime limit on how much each person can transfer into the tax-free retirement phase. The general cap is $2.0 million in 2025-26, though your personal cap can differ depending on indexation and what you have used before (ATO, https://www.ato.gov.au/tax-rates-and-codes/key-superannuation-rates-and-thresholds/transfer-balance-cap). Anything above your cap can't go into retirement phase; it has to either stay in accumulation (still paying 15% on earnings) or be withdrawn from super altogether. For most retirees, whose balances are under the cap, this isn't a constraint — they simply move the lot into the pension. For higher-balance retirees, deciding what to do with the excess is the interesting part.

What should you do with super above the cap?

This is a genuine comparison, not an automatic answer. Leaving the excess in accumulation means 15% on its earnings — which is still concessional, and often better than pulling it out and investing in your own name at marginal tax rates, especially if you have other income. Withdrawing the excess is tax-free once you are 60, and the money can be redeployed usefully: contributed to a spouse's super if they still have cap space, put toward the exempt family home (renovations or paying down a mortgage), or invested personally. Couples have a particularly valuable lever here — by using contribution splitting and withdrawal-and-recontribution to even up their balances, both partners can use their own transfer balance cap, potentially getting up to $4.0 million combined into the 0%-tax environment rather than $2.0 million plus a taxed accumulation account. The right call depends on the numbers, so it is worth running the comparison rather than assuming.

What two mechanical points should you plan around?

There are two mechanical points worth planning around. First, commencing a pension triggers a compulsory minimum drawdown — an age-based percentage you must withdraw each year, starting at 4% under 65 and rising with age (MoneySmart, https://moneysmart.gov.au/retirement-income/account-based-pensions). It is a withdrawal requirement, not a spending one, and it is rarely a reason not to commence — but if you will be forced to draw more than you spend, there are good options for the surplus, such as re-contributing while you are still under 75. In the financial year you commence, the minimum is pro-rated for the part-year, and if you start the pension on or after 1 June, no minimum is required for that stub year (ATO, https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/paying-smsf-benefits/income-stream-pension-rules-and-payments) — a handy bit of timing near year-end. Second, on the Age Pension: once you are at Age Pension age, both accumulation super and an account-based pension are assessed by Centrelink the same way, as financial assets subject to deeming under the income test (Services Australia, https://www.servicesaustralia.gov.au/income-streams), so commencing a pension generally doesn't change your Age Pension — this is overwhelmingly a tax decision, not a Centrelink one. The exception is if you are under Age Pension age, where money in accumulation is exempt from the Centrelink tests until you reach pension age, which is sometimes a reason a younger person deliberately leaves super in accumulation.

What does the commencement decision look like in practice?

These two cases show the commencement decision. They are illustrative only and not personal advice.

Bruno, 66, retired eight months ago. His $750,000 of super is still sitting in accumulation because he assumed it became tax-free "automatically" when he stopped working, and the fund has been paying 15% tax on the earnings the whole time. On these facts, Bruno is squarely in the inertia trap: he has met a condition of release (retired after 60), he is well under the transfer balance cap, and yet his super is needlessly paying 15% on its earnings. On these facts it is generally rational to commence an account-based pension with the full $750,000, moving it into retirement phase so the earnings are taxed at 0% and his pension payments are tax-free (ATO, https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/withdrawing-and-using-your-super/retirement-withdrawal-lump-sum-or-income-stream). On a balance generating perhaps $35,000 to $40,000 of earnings a year, that switch could save him in the order of $5,000 to $6,000 a year in fund tax — money that compounds in his favour for the rest of his retirement. He should be reassured the money isn't locked away (he can still take lump sums on top of the pension) and made aware he will now have a minimum drawdown each year. Bruno's case is the most common and most avoidable mistake in the whole area, and fixing it is one of the easiest wins available.

Carmela, 67, has $2.6 million in super. She knows she can't put all of it into the tax-free pension and isn't sure what to do with the rest. On these facts, Carmela can move up to her transfer balance cap — $2.0 million (ATO, https://www.ato.gov.au/tax-rates-and-codes/key-superannuation-rates-and-thresholds/transfer-balance-cap) — into a retirement-phase account-based pension (0% on earnings, tax-free income), leaving a $600,000 excess that can't go into retirement phase. On these facts it is generally rational to weigh the options for that $600,000 rather than assume: she can leave it in accumulation, where its earnings are taxed at 15% (still concessional, and possibly better than investing it in her own name at marginal rates), or withdraw it tax-free (she is over 60) and redeploy it — for example into her husband's super if he has unused cap space, into their exempt home, or into personal investments. If her husband has room under his own $2.0 million cap, the standout move is to shift money to him (via splitting or recontribution over time) so the couple uses both caps, getting far more of their combined wealth into the 0%-tax environment than leaving $600,000 stranded in her accumulation account. Above the cap there is no automatic answer — it is a comparison between 15% in accumulation and the after-tax position of the alternatives, and for couples the spouse-equalisation angle is usually the most powerful.

For retirees with super in accumulation, commencing a pension is usually the single most valuable, lowest-effort tax decision they can make — yet it is the one most often missed. The work is to confirm a condition of release has been met (so retirement phase, not just a TTR, is available), to default to commencing for a retired 60-plus person and actively fix the accumulation-phase inertia, to measure the balance against the transfer balance cap, to make a considered decision about any excess above the cap (leave it in accumulation at 15%, or withdraw it tax-free and redeploy, including evening up a couple's balances to use both caps), to plan around the minimum drawdown and its year-one timing, and to remember that at Age Pension age this is a tax decision rather than a Centrelink one. The headline is the one too many retirees never hear: your super doesn't become tax-free by itself when you retire — you have to turn it into a pension, and the difference between 15% and zero is well worth the paperwork. The figures move with indexation and law, so confirm the current cap, preservation age, and drawdown rules before acting — but the shape of the decision is durable, and the upside is large.

Sources

• ATO — Retirement withdrawal: lump sum or income stream
• ATO — Transfer balance cap
• ATO — Income stream (pension) rules and payments (minimum drawdown)
• MoneySmart — Account-based pensions
• Services Australia — Income streams (Centrelink assessment)