The retirement phase of super refers to the stage when a member's super is being used to pay a Superannuation income stream that satisfies the conditions for the retirement phase tax exemption under Australian law. A 'retirement phase pension' is an income stream paid from this part of super.

The retirement phase concept was introduced as part of the broader super reforms that took effect from 1 July 2017. These reforms included the introduction of the transfer balance cap, which limits the total amount of super that can be transferred into retirement phase across a member's lifetime.

Retirement phase status is important because Earnings on Assets supporting a retirement phase pension are generally exempt from earnings tax inside the fund, subject to the transfer balance cap. This is one of the most significant tax features of Australia's super system.

How Super Transitions Into Retirement Phase

To start a retirement phase pension, a member must have met a condition of release with a nil cashing restriction. Common qualifying events include retirement after reaching preservation age, ceasing employment after age 60, attaining age 65 (whether retired or not), permanent incapacity and certain other defined circumstances.

Once a qualifying condition is met, the member can commence one or more income streams. The amount transferred into retirement phase counts toward the transfer balance cap, which is reported by the fund through the transfer balance account reporting (TBAR) framework.

Retirement phase pensions can take several forms, including account-based pensions, lifetime annuities, term-certain annuities, market-linked pensions, defined benefit pensions and innovative income stream products. Each has its own rules around drawdown, Capital access and longevity risk.

Earnings on assets supporting retirement phase pensions are generally tax-free inside the fund, while payments to members aged 60 or over are usually tax-free in the member's hands.

Common Users of Retirement Phase Super Pensions 

Retirement phase pensions are commonly used by:

  • Retirees aged 65 or over
  • Members who have retired after reaching preservation age
  • Members who have ceased employment on or after age 60
  • People who have met a permanent incapacity condition of release
  • Recipients of certain defined benefit pensions linked to closed schemes
  • Trustees of SMSFs paying pensions to members

Members who have not met a qualifying condition cannot commence a retirement phase pension. Pre-retirement income streams such as TTR pensions are not in retirement phase until they convert after a full condition of release.

Main Components of Retirement Phase Pensions 

  • Earnings on supporting assets generally tax-free in the fund, subject to the transfer balance cap
  • Payments to members aged 60 or over generally tax-free
  • Minimum drawdown rules apply to account-based and similar pensions
  • Includes a wide range of products: account-based pensions, lifetime pensions, market-linked pensions, defined benefit pensions, annuities and certain innovative products
  • Reported via TBAR to ensure compliance with the transfer balance cap
  • Reversionary and beneficiary Options for income to continue or be paid on death
  • Subject to ongoing super and tax law changes

Why Retirement Phase Pensions Are Commonly Used 

Retirement phase pensions can offer several potential benefits, although outcomes depend on circumstances and product choice.

Tax efficiency is among the most significant benefits. Earnings on assets supporting a retirement phase pension are generally exempt from earnings tax, which can substantially improve after-tax outcomes compared with the accumulation phase or with investments outside super.

Income flexibility is another feature. Account-based pensions allow members to choose drawdown amounts within prescribed minimums, while annuities and lifetime pensions provide more predictable income, including for life in some cases.

Ongoing Investment exposure for many retirement phase pensions means the underlying balance can continue to grow, supporting longer-term sustainability when combined with appropriate strategy.

Factors That May Impact Retirement Phase Outcomes 

Retirement phase pensions are subject to several important risks and limitations.

  • Investment risk: balances can fall in market downturns
  • Longevity risk: account-based pensions can run out if drawdowns are high or returns are low
  • Sequence-of-returns risk: poor returns in early retirement can have a lasting impact
  • Transfer balance cap compliance is critical to avoid excess transfer balance tax
  • Changes in legislation can affect rules around pensions and the cap
  • Past performance is not a reliable indicator of future returns

Tax Treatment of Retirement Phase Superannuation

The retirement phase tax exemption is a fundamental part of Australia's super system. Earnings on assets supporting retirement phase pensions are generally exempt from earnings tax in the fund, while payments to members aged 60 or over are usually tax-free in their hands.

The transfer balance cap limits the total amount of super that can be transferred into retirement phase across all of a member's accounts. The cap is indexed periodically. Amounts above the cap must remain in accumulation or be paid as a lump sum. Excess transfer balance tax applies if the cap is breached and not corrected.

Different types of retirement phase income streams (such as account-based, defined benefit, market-linked and lifetime) have specific valuation and reporting rules under the TBAR framework. Members and trustees must report relevant events to the ATO.

How it fits into Retirement Planning

Most Australians who retire with meaningful super balances will use one or more retirement phase pensions to draw income in retirement. The choice between different income stream products — including account-based pensions, lifetime annuities, market-linked or defined benefit pensions — depends on goals around flexibility, longevity protection, tax outcomes and estate planning.

Combining different types of retirement phase income streams can help manage different risks. For example, an account-based pension can provide flexibility, while a lifetime pension or Annuity can address longevity risk. The interaction with the transfer balance cap, Age Pension and Centrelink rules adds further complexity.

Reviewing arrangements periodically — particularly when the cap or rules change, or when personal circumstances evolve — helps ensure the strategy continues to suit the member's needs.

Areas Retirees Should Review Carefully 

  • Exceeding the transfer balance cap and triggering excess transfer balance tax
  • Failing to convert a TTR to retirement phase after meeting a condition of release
  • Ignoring TBAR reporting obligations for SMSFs
  • Not considering longevity risk when relying solely on an account-based pension
  • Restructuring legacy income streams without considering grandfathered features
  • Failing to update beneficiary nominations after life changes

Retirement Income Planning Questions to Consider 

  • Have I met a condition of release for the retirement phase?
  • What types of retirement phase pension are available within my fund?
  • How does my pension interact with the transfer balance cap?
  • What level of longevity protection do I want, and which products provide it?
  • How will my retirement phase pension interact with the Age Pension means tests?
  • Have I planned for reversionary or beneficiary arrangements on death?