Tax on a Transition to Retirement Pension Explained

Tax on a transition to retirement pension works differently for earnings inside the fund and payments you receive.

If the pension is not in retirement phase, earnings are generally taxed at 15 percent. Pension payments are usually tax free from age 60 in taxed super funds, but different rules apply under age 60.

If you want the full structure first, read: Transition to Retirement Explained

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Are Earnings Inside a Transition to Retirement Pension Tax Free?

No, not while the pension is still a TTR and not in retirement phase.

Earnings on the assets supporting a transition to retirement pension are generally taxed at 15 percent inside the super fund. That includes:

• Interest
• Dividends
• Rental income
• Capital gains

This rule changed from 1 July 2017. Before that date, some TTR pensions could claim earnings exemption. That is no longer the case unless the pension moves into retirement phase.

This is one of the most common misunderstandings in TTR tax rules.

A transition to retirement pension does not automatically create a tax free environment.

The Australian Taxation Office sets out the formal transition to retirement rules in its official guidance: ATO transition to retirement guidance

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When Do Earnings Become Tax Free?

Earnings may become exempt from tax once the pension moves into retirement phase.

This happens when you meet a full condition of release, such as:

• Turning 65
• Retiring after reaching preservation age
• Permanent incapacity
• Terminal medical condition

At age 65, the transition to retirement pension automatically moves into retirement phase.

When that occurs:

• The 10 percent withdrawal cap is removed.
• The pension counts toward your transfer balance cap.
• Earnings on assets supporting the pension may become exempt current pension income, subject to the fund claiming that exemption.

More detail here: What Happens to a TTR at Age 65?

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Are Transition to Retirement Pension Payments Tax Free?

This depends on your age and the components of your super.

From Age 60

If you are 60 or over and your super fund is a taxed fund, transition to retirement pension payments are generally tax free in your hands.

You usually do not include them in your tax return.

Under Age 60

If you are under 60:

• The taxable component of each payment is assessable income.
• You receive a 15 percent tax offset on the taxable component.
• The tax free component is not taxed.

The proportion of taxable and tax free components is fixed when the pension starts. You cannot choose which component to withdraw.

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Does a Transition to Retirement Pension Count Towards the Transfer Balance Cap?

No.

A transition to retirement pension does not count toward your transfer balance cap while it is not in retirement phase.

Once it moves into retirement phase, the value at that time becomes a transfer balance credit.

This is relevant for people with larger superannuation balances or multiple pensions.

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Practical Example

Imagine you are 61 with a transition to retirement pension balance of 500,000.

The fund earns 5 percent for the year.

• Earnings of 25,000 are generally taxed at 15 percent while the pension is not in retirement phase.
• If you withdraw 20,000 in pension payments and you are over 60, that payment is generally tax free in your hands.

Earnings inside the fund are taxed.
Payments to you may not be.

That distinction is critical when modelling outcomes.

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Tax and Salary Sacrifice in a TTR Strategy

Many transition to retirement strategies involve increasing concessional contributions while drawing pension income.

The potential benefit comes from the difference between:

• Your marginal tax rate, including Medicare levy, and
• The 15 percent contributions tax inside super.

Contribution caps still apply, and Division 293 tax may apply at higher income levels.

The withdrawal limits also shape the strategy: TTR Minimum and Maximum Withdrawal Rules Explained

And the mechanics of contribution strategies are explained here: How Salary Sacrifice Works With a TTR

If the tax difference is small, the strategy may not justify the complexity.

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Common Misunderstandings About TTR Tax

1. “A transition to retirement pension makes all my super tax free.”
   It does not, unless it is in retirement phase.

2. “Pension payments are always tax free.”
   They are generally tax free from age 60 in taxed funds, but not under 60.

3. “Tax savings alone justify starting a TTR.”
   Often, the benefit depends on time horizon, contribution caps, and fees.

For broader strategy risks: Common TTR Mistakes

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Model the Tax Outcome Properly

Small differences in income, contribution levels, and time horizon can change the result.

Before implementing a strategy, test it properly:

Use the Transition to Retirement Calculator

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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. Under age 60, the taxable component is assessable income with a 15 percent tax offset.

Are earnings inside a TTR pension tax free?

No. If the TTR is not in retirement phase, earnings are generally taxed at 15 percent within the super fund.

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.