Once super moves into pension phase, earnings inside the fund — dividends, interest, capital gains — are taxed at 0%, up to the Transfer Balance Cap of $2.1 million per person for FY2026-27 ($4.2 million for a couple). Amounts above the cap stay in accumulation phase, taxed at 15%. Franking credits are fully refundable in pension phase, making it the most tax-effective environment for Australian shares.
Australian superannuation has two tax regimes that apply at different stages. In accumulation phase — while working and building the balance — earnings inside the fund are taxed at 15%, and capital gains on assets held for more than 12 months are effectively taxed at 10% (after the one-third discount). In pension phase — once a retirement income stream is established — earnings are taxed at 0%, entirely. Zero tax on dividends, interest, distributions, and capital gains within the pension account for as long as the account remains in pension phase.
For retirees with substantial super, this is one of the most valuable and durable tax concessions in the Australian system. It is not a one-off benefit at retirement; it compounds across what may be a 20–30 year retirement, with every year's earnings inside the pension account accumulating without tax leakage.
How the transition works
Pension phase begins when a member establishes a retirement income stream — typically an account-based pension — from their super. The conditions are: the member has reached preservation age (age 60 for most people born after 1 July 1964) and has satisfied a condition of release (typically retired from employment, or simply turning 65), or the member has reached age 65 regardless of employment status. Once a pension is established and assets are transferred from the accumulation account to the pension account within the fund, the earnings on those assets become tax-free.
The transition does not happen automatically. The member must actively establish the pension. Fund administration handles the mechanics; the member's instruction to begin an account-based pension is the trigger.
The 0% earnings tax does not apply without limit. The Transfer Balance Cap (TBC) is the ceiling on how much can be held in tax-free pension phase. The general TBC is $2.1 million for FY2026-27, up from $2.0 million in FY2025-26. The cap was introduced at $1.6 million from 1 July 2017 and has been indexed upwards in increments since then.
Each individual has their own personal Transfer Balance Account that tracks how much has moved into pension phase throughout their life. A member who transfers $2.1 million to pension phase uses their full cap; any further super above that amount remains in accumulation at 15%. Earnings on the excess accumulation portion continue to be taxed at the 15% rate — still concessional relative to personal-name investment outside super, but not tax-free.
For couples, each spouse has their own TBC. Both partners can independently move up to $2.1 million each into pension phase, for a combined $4.2 million earning tax-free. This is one of the primary reasons super balance equalisation between spouses is strategically valuable: an imbalanced couple where one spouse has $3.5 million and the other has $500,000 can move only $2.6 million total into pension phase (the wealthier spouse is capped at $2.1M; the other has $500,000 eligible), leaving $1.4 million in accumulation. A balanced couple can move the full $4.2 million.
A worked example
A 65-year-old retiree with $2.2 million in super transfers $2.1 million to an account-based pension and leaves $100,000 in accumulation.
Annual earnings at a 6% return: the pension account earns $126,000 (tax-free); the accumulation account earns $6,000, taxed at 15%, producing a $900 tax bill. Total tax on $132,000 of investment income: $900 — an effective rate of about 0.7%. The equivalent after-tax return on personal investment (at a 32% marginal rate) would carry around $42,000 in tax. The pension phase structure saves approximately $41,000 in tax in a single year on this balance.
Over a 25-year retirement at these approximate rates, the cumulative difference runs to several hundred thousand dollars. The 0% earnings tax is not a marginal benefit — for retirees with balances at or near the cap, it is one of the most significant financial advantages available.
Franking credits in pension phase
For pension phase super holding Australian shares, the interaction with the dividend imputation system produces an additional benefit. Because the fund's earnings tax rate is 0%, every franking credit attached to a dividend is refundable in cash. A $100,000 holding in fully franked Australian shares yielding 5% produces $5,000 in dividends and approximately $2,143 in attached franking credits ($5,000 × 30/70). In pension phase, the fund owes no tax on those dividends, so the full $2,143 is refunded by the ATO. The effective yield on the holding is approximately 7.1% before any growth — entirely from the combination of dividends and the franking credit refund. For substantial Australian share holdings, pension phase super is the most tax-effective investment environment available.
Minimum drawdowns
Pension phase is not a passive accumulation strategy. Account-based pensions require minimum annual drawdowns based on the account balance and the member's age. The drawdown percentages increase with age — starting at 4% per year at age 65–74 and rising to 14% or more for members over 95. These drawdowns must be paid to the member each year. The fund is designed to gradually distribute the balance across retirement, not hold it indefinitely.
Assets can be rebalanced, sold, and reinvested within the pension account — all without triggering CGT within the fund. But the account balance does not simply grow undisturbed; the combination of drawdowns, investment returns, and the capital run-down is the designed outcome of the structure.
Strategic priorities
For pre-retirees, the pension phase transition is one of the most consequential events in retirement planning. The decision about when to start the pension, how much to transfer (versus leaving in accumulation), how to coordinate with a spouse's timing, whether to consolidate multiple accounts first, and whether to make final contributions before starting the pension all have material implications. Getting specialist advice at this transition point typically produces better long-term outcomes than navigating it unguided.
Sources
- Transfer balance cap — key super rates and thresholds (ATO)
- Exempt current pension income (ATO)
- Retirement withdrawal – lump sum or income stream (ATO)
- Payments from super — minimum drawdown factors (ATO)
- Conditions of release (ATO)
- Retirement income and tax (Moneysmart)
Key takeaways
- Earnings inside a pension phase super account — dividends, interest, distributions, capital gains — are taxed at 0%, compared with 15% in accumulation phase.
- The Transfer Balance Cap limits how much can sit in tax-free pension phase — $2.1 million per person for FY2026-27, or $4.2 million combined for a couple where each has their own cap.
- Super above an individual's Transfer Balance Cap must stay in accumulation phase, still taxed at a concessional 15% — not tax-free, but better than personal marginal rates.
- Franking credits on Australian shares are fully refundable in pension phase (since the fund's tax rate is 0%), making it one of the most tax-effective environments for holding franked shares.
- Pension phase requires minimum annual drawdowns based on age and account balance — starting at 4% a year from 65-74 and rising with age — so it isn't a passive, indefinite accumulation strategy.
Frequently asked questions
How is pension phase super taxed differently from accumulation phase?
Earnings inside a pension phase account — dividends, interest, distributions, and capital gains — are taxed at 0%, compared with 15% (effectively about 10% on long-held capital gains, after the one-third discount) in accumulation phase.
How much super can I move into tax-free pension phase?
Up to your personal Transfer Balance Cap, which is $2.1 million for FY2026-27. Couples each have their own cap, so together they can move up to $4.2 million into pension phase tax-free.
What happens to super above the Transfer Balance Cap?
It has to stay in accumulation phase, where earnings continue to be taxed at 15% rather than 0%. That's still concessional compared with personal marginal tax rates, but it isn't tax-free like the pension phase portion.
Do I have to withdraw money from my pension phase account every year?
Yes. Account-based pensions require a minimum annual drawdown based on your age and account balance, starting at 4% a year from age 65-74 and rising to 14% or more over age 95 — pension phase is designed to gradually distribute the balance, not hold it indefinitely.