One of the most important advantages of superannuation is the preferential tax treatment on money going out. But the rules aren't the same for everyone. How much tax (if any) you pay on super withdrawals depends on your age, whether you take money as a pension or a lump sum, and what the money inside your fund has been made up of over the years.
This post breaks it down in plain English.
This post contains general information only. Tax on super withdrawals is complex and depends on your individual circumstances, the components of your super balance, and your total income. This is not tax or financial advice. Please speak with your SMSF accountant before making withdrawal decisions.
Step One: Understanding the Two Components of Your Super Balance
Before you can understand how withdrawals are taxed, you need to understand that your super balance is made up of two components:
| Component | What It Is | Tax on Withdrawal |
|---|---|---|
| Tax-free | After-tax contributions (non-concessional contributions) and certain other amounts | Never taxed — always withdrawn tax-free regardless of age |
| Taxable — taxed element | Concessional contributions (employer SG, salary sacrifice, personal deductible) and investment earnings taxed in the fund at 15% | Taxed depending on your age (see tables below) |
| Taxable — untaxed element | Less common in SMSFs — arises in some government funds or foreign transfers | Taxed at higher rates — see ATO guidance |
Every withdrawal, whether a pension payment or a lump sum, must be taken in the same proportion as these components in your account. This is called the proportioning rule. You can't choose to take only the tax-free component first.
The ratio of your tax-free to taxable component is unique to your fund. Your SMSF accountant can tell you what yours is.
Preservation Age: When Can You Access Super?
You can't simply take money out of super whenever you like. You must meet a condition of release — and the most common one is reaching your preservation age and retiring, or turning 65 (which allows access regardless of work status).
As at 2025–26, the preservation age is 60 for everyone born after 30 June 1964. For those born before that date, the preservation age has already been reached.
Other conditions of release include: terminal medical condition, permanent incapacity, severe financial hardship, and compassionate grounds — though these have their own rules and are not covered in depth here.
Tax on Pension Payments (Income Streams)
An account-based pension is the most common way SMSF members draw on their super in retirement. Once you've transferred your balance into retirement phase, the fund's earnings on those assets become tax-exempt. Here's how the pension payments themselves are taxed:
| Your Age | Tax on Pension Payments |
|---|---|
| Under preservation age (60) | Generally not accessible as a pension — must meet another condition of release |
| Preservation age to 59 (transitional cases) | Taxable component included in assessable income; 15% tax offset applies to reduce the tax payable |
| Age 60 and over | Pension payments from a taxed source are completely tax-free — not included in assessable income at all |
For the vast majority of SMSF members drawing a pension, payments are completely tax-free. The 15% tax offset available between preservation age and 59 also significantly reduces the effective tax rate for those in the transitional age bracket.
Transition to Retirement (TRIS) pensions allow you to draw on super while still working, between preservation age and 65. They have a maximum annual withdrawal limit of 10% of the account balance per year. Once a member fully retires or turns 65, the TRIS moves to full retirement phase.
Tax on Lump Sum Withdrawals
Lump sum withdrawals are one-off payments out of the super system. They can be taken in addition to pension payments (once you're fully in retirement phase), or as the primary form of benefit payment if you haven't started a pension.
Lump sums can also be taken in-specie, meaning you receive actual assets (like shares or property) rather than cash, though specific rules apply.
| Your Age | Tax-Free Component | Taxable Component (Taxed Element) |
|---|---|---|
| Under preservation age | Tax-free | Taxed at 20% (+ Medicare levy), or marginal rate if lower |
| Preservation age to 59 | Tax-free | First $245,000* is tax-free (low rate cap); above $245,000 taxed at 15% + Medicare |
| Age 60 and over | Tax-free | Tax-free (regardless of amount) |
| Any age — terminal medical condition | Tax-free | Tax-free |
*The low rate cap for 2025–26 is $245,000. It is a lifetime cap, indexed annually. Once you have used your full low rate cap across all lump sum withdrawals since reaching preservation age, any further taxable component in lump sums is taxed at 15% (+ Medicare). Check your current low rate cap position with your accountant.
Pension vs Lump Sum: A Simple Comparison
| Account-Based Pension | Lump Sum | |
|---|---|---|
| Tax from age 60 | Tax-free | Tax-free |
| Minimum withdrawals | Yes — age-based percentage annually | No minimums |
| Maximum withdrawals | No maximum in retirement phase | No maximum |
| Transfer Balance Cap applies? | Yes — limited to $2M in retirement phase | No TBC (paid out of super system) |
| Effect on Centrelink | Counted as income for assessable income test | Counted as asset (once received) |
| Estate planning | Pension continues if reversionary; otherwise ends at death | Can be directed via BDBN |
| Ongoing super tax benefits | Fund earnings tax-exempt in retirement phase | Fund earnings become taxable on remaining balance only |
The comparison above is a simplified summary of general principles. The best approach for your situation depends on your age, income, asset mix, Centrelink position, and estate planning objectives. This is not financial advice.
What About the Transfer Balance Cap?
When you start a pension from your SMSF, the amount you transfer into retirement phase is credited to your personal Transfer Balance Account. Your cap (as at 1 July 2025) is $2 million.
Once you've used your full $2 million cap, any excess must remain in accumulation phase (where earnings are taxed at 15%) or be withdrawn from super entirely. It cannot be moved into the tax-free retirement phase environment.
If you take lump sums from your pension account, your Transfer Balance Account is debited — potentially freeing up cap space for future transfers if you've rolled money back from a commutation.
The Bottom Line
For most SMSF members aged 60 and over, withdrawals from super, whether as pension payments or lump sums, are completely tax-free. This makes super one of the most tax-effective retirement vehicles available in Australia.
The tax picture is more complex for those under 60, those with significant taxable components, or those approaching the Transfer Balance Cap. Getting the timing and structure of withdrawals right can make a meaningful difference.
Want to model the right withdrawal structure for your fund?
The right mix of pension payments and lump sums depends on your age, balance, income, and estate planning goals. Joy can walk you through the numbers.
Talk to Joy →This post contains general information about tax on super withdrawals only. Tax on super benefits is complex and individual outcomes depend on the specific components of your super balance, your age, your total income, and your specific circumstances. The Super Co CBR Pty Ltd is a registered tax agent and SMSF specialist accounting firm. We are not a licensed financial services provider. Before making any decision about how to take benefits from your SMSF, please speak with your SMSF accountant and, where appropriate, a licensed financial adviser. Information reflects the law and ATO guidance as at May 2026.
