Tax on a Transition to Retirement Pension Explained

Tax on a transition to retirement pension is two separate questions: tax on earnings inside the super fund, and tax on the pension payments you receive.

They are easy to mix up. Fund earnings on a TTR that is still outside retirement phase can be taxed at up to 15 percent. Pension payments to you, from age 60 in a taxed fund, are generally tax-free. One of those can be true while the other is not.

The broader structure is in the transition to retirement pension guide. The ATO's overview is here: ATO transition to retirement guidance

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1. Tax on earnings inside the super fund

While the pension remains a TTR and has not moved into retirement phase, the fund's taxable earnings on assets supporting that pension can be taxed at up to 15 percent. That can include interest, dividends, rental income and capital gains.

It is not correct to say every capital gain is simply taxed at 15 percent. Complying super funds can apply a one-third CGT discount to eligible capital gains on assets held for at least 12 months. After that discount, the remaining gain is taxed at 15 percent, so the effective rate on those eligible discounted gains is 10 percent.

From 1 July 2017, a TTR that is not in retirement phase cannot claim the earnings exemption that applies to retirement-phase pensions. That change is why a TTR is not a tax-free investment environment just because it is labelled a pension.

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2. Tax treatment of pension payments to you

Anyone newly starting a TTR now has reached preservation age 60. In a taxed super fund, those pension payments are generally tax-free in your hands. You usually do not include them in your tax return.

The split between the tax-free component and the taxable component is fixed when the pension starts. You cannot choose which component to draw.

Legacy and untaxed-fund situations

A small group of people still need the older rules.

If a TTR was started years ago while the person was under 60, the taxable component of each payment was assessable income with a 15 percent tax offset, and the tax-free component was not taxed. That is not the typical case for a new TTR in 2026–27.

Payments from an untaxed fund, such as some public sector schemes, can be taxed even after 60. If your super is in an untaxed scheme, do not rely on the taxed-fund summary above.

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When fund earnings can become tax-free

Earnings on assets supporting the pension may become exempt current pension income once the pension is in retirement phase, and only if the fund claims that exemption.

Turning 65 moves a TTR into retirement phase automatically. Other conditions of release, such as retirement after preservation age, permanent incapacity or a terminal medical condition, can also move the pension into retirement phase. For those other conditions, the fund or provider generally needs to be notified. Meeting the condition in your own circumstances does not, by itself, change the fund's tax treatment if the fund has not been told.

Once the pension is in retirement phase:

• The 10 percent payment cap no longer applies.
• The value counts toward your transfer balance cap. The general cap is $2.1 million from 1 July 2026, though a person's personal cap can be different.
• Earnings may become exempt current pension income if the fund claims the exemption.

See what happens to a TTR at age 65.

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Does a TTR count towards the transfer balance cap?

Not while it remains outside retirement phase.

When it moves into retirement phase, the value at that time becomes a transfer balance credit. That is a tracking rule. It does not change the account balance by itself, but it does use part of the cap available for retirement-phase pensions.

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A simple earnings versus payments example

Assume you are 61 with a TTR balance of $500,000, the pension is not in retirement phase, and the supporting assets earn $25,000 for the year.

• Taxable fund earnings can be taxed at up to 15 percent. If some of that $25,000 is an eligible discounted capital gain, the effective rate on that part can be lower than 15 percent.
• If you withdraw $20,000 as a pension payment and the fund is a taxed fund, that $20,000 is generally tax-free in your hands.

The fund can be paying tax on earnings in the same year that you receive a tax-free pension. Those two outcomes sit side by side.

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Tax and salary sacrifice

Many TTR strategies combine extra concessional contributions with pension payments. The possible personal-tax saving is the difference between your marginal rate (including Medicare levy) and the 15 percent contributions tax.

For 2026–27 the concessional cap is $32,500, Super Guarantee is 12 percent, and Division 293 can apply once income plus concessional contributions exceed $250,000. Those contribution rules are explained with a full worked example in how salary sacrifice works with a TTR. Payment limits that constrain how much pension you can draw are in TTR minimum and maximum drawdowns.

If the tax difference is small after contributions tax, extra fees and the forced minimum withdrawal, the structure may not be worth running. That is a planning question, not a reason to assume a TTR is tax-free.

To see the tax effect on take-home pay and super for a given salary and balance, use the Transition to Retirement Calculator.

If you want the tax treatment checked as part of a retirement plan, I can help through my retirement planning service.

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FAQs

Are transition to retirement pension payments tax free?

From age 60 in a taxed super fund, TTR pension payments are generally tax free in your hands. Anyone newly starting a TTR now is at least 60, so the older under-60 payment rules are rarely relevant to a new pension.

Are earnings inside a TTR pension tax free?

No. While the TTR is outside retirement phase, taxable fund earnings can be taxed at up to 15 percent. Eligible discounted capital gains can be taxed at a lower effective rate. Earnings are not automatically tax free.

Does a TTR count towards the transfer balance cap?

No. A TTR does not count towards the transfer balance cap until it moves into retirement phase.