Thinking about retiring with an SMSF? Discover how an SMSF pension can help you eliminate tax on investment earnings and structure your retirement income smartly.
What is an SMSF Pension and Why Should You Care?
If you’re running your own Self-Managed Super Fund, transitioning into SMSF pension mode could be one of the smartest moves you make as you approach retirement. This isn’t just about receiving regular income – it’s a strategy that could significantly reduce, or even eliminate, tax on your super fund earnings.
At Accountants 2 Business, many of our clients are small business owners who’ve worked hard to build up their retirement savings. They want to make sure they’re getting the most out of their SMSF—and rightly so.
A common question we get is:
“Is it really worth switching to an SMSF pension when I retire?”
Let’s break it down for you.
How Does an SMSF Pension Work?
Once you retire or meet a superannuation condition of release, you can convert your SMSF balance from an accumulation account into a pension account. Here’s what happens:
- Accumulation Account: Contributions and earnings are taxed at 15%.
- Pension Account: Earnings on your pension balance are tax-free—yes, really!
This means you’re keeping more of your money working for you, instead of handing it over to the ATO.
“We’re saving thousands a year in tax since moving to pension mode—wish we’d done it earlier.”
— A2B Client, Brisbane
The Tax Benefits of Starting an SMSF Pension
Let’s say your SMSF earns $40,000 in investment income per year. If half of your fund is in pension mode, you could halve your fund’s taxable income—potentially saving over $10,000 in tax annually.
Some clients choose to place 100% of their SMSF into pension mode, resulting in zero tax on fund earnings. The only unavoidable cost is the SMSF supervisory levy, currently $259 per year.
💡 Keep in mind: If only part of the fund is in pension mode, you’ll need an actuarial certificate (approx. $165/year) to calculate the tax-free portion.
You can read more about managing SMSF tax and compliance here.
Minimum Withdrawal Rules for SMSF Pension
One of the biggest traps SMSF trustees fall into is forgetting the minimum pension withdrawal requirement.
The required withdrawal is based on your age and the balance of your pension account on July 1 each year:
| Age | Minimum % Withdrawal |
| 60–64 | 4% |
| 65–74 | 5% |
| 75–79 | 6% |
| 80–84 | 7% |
| 85–89 | 9% |
| 90–94 | 11% |
| 95+ | 14% |
Why Missing the Minimum Can Cost You
Failing to withdraw the minimum amount for the year can result in your pension account being “rolled back” to an accumulation account, losing its tax-free status. That’s a costly mistake—and one we sadly see too often when people try to manage things without advice.
“We didn’t realise missing the minimum would cancel our pension. Luckily our accountant picked it up before EOFY.”
— A2B Client, Gold Coast
Important Considerations Before Starting an SMSF Pension
While the tax benefits are compelling, switching to SMSF pension mode isn’t always a no-brainer. There are a few important things to keep in mind.
Cost of Establishing an SMSF Pension
You’ll need proper documentation to commence a pension. This usually costs around $990 + GST per pension, and you’ll need to do it again if you stop and restart the pension later.
Ongoing Compliance & Reports
If you’re only putting part of your fund into pension mode, you’ll need an annual actuarial certificate to determine the tax-free earnings portion. This is a compliance cost, at about $165 currently, but the savings usually far outweigh the expense.
Estate Planning and Contribution Limits
Once your balance is in a pension account, you can’t make new contributions to that specific account. Any new contributions will be allocated to a new accumulation account. If your estate plan includes topping up super, this is something to plan for carefully.
Staying Compliant with the ATO
Even if your SMSF is in full pension mode and paying no tax, you still must lodge annual SMSF returns and pay the annual SMSF levy.
Need help staying compliant? We’ve written about the essentials of SMSF administration in this related post.
Common Mistakes with SMSF Pensions (And How to Avoid Them)
Many trustees assume that moving into pension mode is a “set and forget” strategy—but it’s not.
Forgetting the Minimum Withdrawal
As mentioned, this is the most common mistake. Mark your calendar, set reminders—do whatever it takes to ensure you don’t miss it.
Assuming All the Fund Must Be in Pension Mode
Sometimes a part-pension strategy is more appropriate, especially if you’re still receiving contributions or want to maintain some accumulation flexibility.
Failing to Seek Ongoing Advice
Just like tax planning, your SMSF pension strategy needs regular review. What worked last year may not be optimal this year.
Final Thoughts: Is an SMSF Pension Right for You?
If you’re nearing retirement and want to take full control of your tax position, an SMSF pension can be a fantastic tool. It allows you to take income from your superannuation while enjoying tax-free investment earnings.
But like all great strategies, it comes with rules and responsibilities.
At Accountants 2 Business, we’ve helped hundreds of SMSF trustees manage their pensions successfully—and we can help you too. Whether you’re ready to start or just weighing your options, we offer practical, down-to-earth advice to help you make smart financial decisions.
📞 Want to talk it through? Contact us via our website to book a free initial consultation.
External Resources for Further Reading:
Disclaimer: This article provides general information only. It does not constitute financial advice. Always consult your accountant or financial advisor to assess your personal situation before starting an SMSF pension.
