Defined benefit income cap and tax after 60, explained
By George Iacovou, Principal Financial Adviser · Superannuation guides · Updated September 2026 · 10 minute read
The short version
- Whether a super pension is tax-free after 60 depends on its source. From 60, the taxed element and tax-free component are not assessable income, subject to the defined benefit income cap for capped defined benefit income streams. An untaxed element is taxed at marginal rates with a 10% tax offset.
- The defined benefit income cap is $131,250 for 2026-27. For a capped defined benefit income stream, 50% of taxed-element and tax-free income above the cap is included in assessable income.
- The 10% tax offset on an untaxed element is capped at $13,125 for 2026-27, and it is reduced if your total capped defined benefit income is over the cap, with taxed-element and tax-free income counted against the cap first.
- A lifetime defined benefit pension counts towards the transfer balance cap at 16 times its annual entitlement.
- The dollar figures are indexed, so they change over time. Your fund can tell you which components your own pension has.
Is my defined benefit pension tax-free after 60?
It depends on whether the payments come from an element that was taxed in the fund or one that was not. From 60, a taxed element is not assessable income. For capped defined benefit income streams, such as lifetime pensions, that holds up to the defined benefit income cap, and 50% of taxed-source income above it is assessable. An untaxed element is taxed at your marginal rate, with a 10% tax offset.
The taxable part of a super benefit can be made up of a taxed element, an untaxed element or both, "depending on whether the benefit is paid from a taxed or untaxed source". The ATO notes that "A super benefit containing an untaxed element is most commonly in a public sector fund."
For super income streams paid to someone aged 60 or more, the ATO's tax tables set out the difference:
Element taxed in the fund. Not assessable, not exempt income.
Element untaxed in the fund. Taxed at marginal rates, with a 10% tax offset.
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The tax-free component is generally not taxed. Other ATO guidance applies the defined benefit income cap to capped defined benefit income streams: the taxed element and tax-free component count towards the cap, and 50% of that income above the cap is assessable.
Which one applies depends on your scheme. QSuper's actuary says QSuper "is a complying superannuation scheme and is taxed accordingly". A QSuper Standard Defined Benefit account is paid as a lump sum, and ART's Defined Benefit Account Guide says that once it moves to a Retirement Income account, "if you are over age 60, payments from your Income account are also tax-free". The Australian Government Actuary describes the DFRDB as untaxed, and the unfunded employer component of MilitarySuper as untaxed. The ATO notes that, due to the court decision in Commissioner of Taxation v Douglas, "the tax and superannuation treatment of some invalidity benefit payments has changed", so this guide does not cover military invalidity pensions.
For other schemes, the ATO says "Your super fund can tell you how much of the money in your super account is tax-free or taxable", and your payment summary shows how much of what you received is taxable and how much is tax-free.
Our guide to super at 60 covers the general rules for account-based pensions, and our QSuper defined benefit guide explains how that scheme's benefit becomes retirement income.
What is the defined benefit income cap?
It limits how much income you can receive tax-free from capped defined benefit income streams. For 2026-27 it is $131,250, which is the $2.1 million general transfer balance cap divided by 16.
The ATO describes the cap this way: "From 1 July 2017, the 'defined benefit income cap' limits the amount of tax-free income the payee can receive from a capped defined benefit income stream (pension or annuity)." It is relevant if you are 60 or over, or under 60 and a death benefits dependant, where the person who died was 60 or over.
Capped defined benefit income streams include:
lifetime pensions, regardless of when they start
lifetime annuities, life expectancy pensions and annuities, and market-linked pensions and annuities that existed before 1 July 2017.
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If you receive an income stream from a defined benefit interest, the ATO says "you should check with your super provider to determine if it is a capped defined benefit income stream".
The cap was $125,000 for 2025-26 and is $131,250 for 2026-27. The ATO says it "increases over time based on indexation of the general transfer balance cap" and "is an annual cap that is reset, and may be reduced, each year". The circumstances the ATO lists include turning 60 part-way through the year while receiving a capped defined benefit income stream, and so starting to receive concessional tax treatment, or starting a capped defined benefit income stream with concessional tax treatment for the first time part-way through the year.
The ATO's Defined benefit income cap tool works through whether you can claim a tax offset on an untaxed element.
What happens if my taxed-source pension is over the cap?
Up to the cap, taxed-element and tax-free income from a capped defined benefit income stream is not taxed for someone 60 or over. Above the cap, 50% of the excess is included in your assessable income and taxed at your marginal rate.
The ATO rule: "If your defined benefit income is comprised of a taxed element, a tax-free component, or both - 50% of your defined benefit income (excluding any amounts from an untaxed element) that exceeds your defined benefit income cap is included in your assessable income." In the ATO's own example for 2020-21, when the cap was $100,000, a 62-year-old with a $67,000 tax-free component and a $50,000 taxed element includes $8,500 in assessable income.
How the 50% rule works, illustration only. Say a pension from a taxed source pays $150,000 in 2026-27 and the full $131,250 cap applies. The excess is $18,750, and 50% of that, $9,375, is included in assessable income. The rest of the pension is not assessed. The figures are invented to show the mechanics.
Funds apply the same rule when they withhold tax. Under Schedule 13, where a payee's annualised tax-free component and taxed element is greater than the cap, "Withholding applies to 50% of the amount over the cap." In the ATO's Schedule 13 example, a payee over 60 receiving the equivalent of $52,000 a year from a taxed source is below the cap, so no tax is withheld.
How is an untaxed defined benefit pension taxed after 60?
The untaxed element is taxed at your marginal rate, with a tax offset of 10% of the untaxed element. That offset is capped at 10% of the defined benefit income cap, which is $13,125 for 2026-27, and it is reduced if your total capped defined benefit income is over the cap, with taxed-element and tax-free income counted against the cap first.
The ATO lists a super income stream tax offset of 15% of the taxed element and 10% of the untaxed element, and says you "may be eligible" for it. The 15% offset on a taxed element does not matter from 60, because a taxed element within the cap is not assessable. Under 60, the 15% offset now generally applies only to disability super benefits and death benefit income streams. For an untaxed element the offset only starts at 60, except for some death benefit income streams.
The cap on the untaxed-element offset rises with the income cap:
| Income year | Maximum tax offset on an untaxed element |
|---|---|
| 2026-27 | $13,125 |
| 2025-26 | $12,500 |
Sources: ATO, Retirement withdrawal: lump sum or income stream, last updated 31 March 2026.
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The whole untaxed element is included in assessable income. The offset is reduced if your total capped defined benefit income goes over the cap. The ATO says "your taxed element sourced income is counted first ('stacked') before your untaxed element sourced income when calculating your entitlement to tax offsets", so if your capped defined benefit income, from one pension or more, mixes taxed and untaxed amounts, the 10% offset only applies to untaxed-element income that fits under what is left of the cap. The ATO's withholding example shows a payee over 60 receiving an untaxed element of $140,400 a year; because that is greater than the $131,250 cap, the tax offset is capped at $13,125 for the year. The offset on an untaxed element won't be shown on your payment summary.
How the offset works, illustration only. Say someone aged 62 has no other capped defined benefit income and their pension pays $60,000 in 2026-27, all of it an untaxed element. The whole $60,000 is assessable income, taxed at their marginal rate, and the tax offset is 10% of $60,000, which is $6,000. The offset reduces the tax payable, not the assessable income. The figures are invented to show the mechanics.
Does a defined benefit pension count towards the transfer balance cap?
Yes. A capped defined benefit income stream is credited to your transfer balance account at a special value, which for a lifetime pension is the annual entitlement multiplied by 16. Because any excess transfer balance generally cannot be commuted from these pensions, going over the cap is handled differently from an account-based pension.
The ATO's formula: "For lifetime pension or annuity, your special value is your annual entitlement multiplied by 16." Your fund calculates the special value and reports it to the ATO, and it is recorded as a credit in your transfer balance account.
When you start a retirement phase income stream for the first time, your personal transfer balance cap equals the general cap at that time, which is $2.1 million from 1 July 2026. If you had a retirement phase income stream, such as a defined benefit pension, before 1 July 2026, your personal cap is either the cap that applied when you first exceeded it, or between $1.6 million and $2 million based on the highest ever balance of your transfer balance account. You can use ATO online services to view your personal transfer balance cap.
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How the special value works, illustration only. A lifetime defined benefit pension with an annual entitlement of $80,000 has a special value of $80,000 multiplied by 16, which is $1,280,000. That amount counts towards your personal transfer balance cap. The figures are invented to show the mechanics.
For capped defined benefit income streams, the ATO says "any excess transfer balance is generally unable to be commuted from these income streams". In the ATO's own example, an excess that comes solely from a capped defined benefit income stream is not an excess transfer balance, although amounts above the defined benefit income cap may still need to be included in assessable income. If you exceed your personal transfer balance cap because of a combination of capped defined benefit income streams and account-based income streams, the ATO says tax consequences may apply to the income from the capped defined benefit income streams, and "you may need to commute your account-based pension and be liable for excess transfer balance tax".
That is why it is worth checking how a defined benefit pension and an account-based pension will sit together against your cap before either begins. Our guide to defined benefit pensions and the Age Pension covers the Centrelink side of the same decision.
How are untaxed super lump sums taxed after 60?
From 60, a taxed element in a lump sum is not taxed. An untaxed element is taxed at your marginal rate or 17%, whichever is lower, including Medicare levy, up to the untaxed plan cap for that fund, which is $1,935,000 for 2026-27 less the untaxed element of lump sums already received from it. Amounts above that cap are taxed at the top marginal rate.
The ATO's table for a lump sum paid at 60 or older shows the untaxed element taxed at your marginal tax rate or 17%, whichever is lower, unless the sum of the untaxed element of all super lump sum benefits received under the super plan exceeds the untaxed plan cap. "Amounts above the cap are taxed at the top marginal rate. The untaxed plan cap applies separately to each super fund you receive super lump sums from." The ATO adds that the cap "is reduced by the total amount of each untaxed element in the fund that you have received from that fund".
The untaxed plan cap was $1,865,000 for 2025-26 and is $1,935,000 for 2026-27. It matters when a scheme lets you take some or all of a benefit as a lump sum instead of a pension, because the lump sum and the pension are then taxed under different rules.
Where people usually stand
Taxed-source pension under the cap
From 60, taxed-element and tax-free payments from capped defined benefit income streams are not assessable income while that income stays within your defined benefit income cap ($131,250 for a full year in 2026-27). What matters is your income from all capped defined benefit income streams, and whether your cap is reduced because you turn 60 or start your first capped defined benefit pension part-way through the year.
Untaxed pension
The untaxed element stays assessable income, with a 10% tax offset from 60 that is capped at $13,125 for 2026-27 and reduced if your total capped defined benefit income is over the cap, with taxed-element and tax-free income counted against the cap first. What matters is your total taxable income, because the pension is taxed at your marginal rate.
Pension and account-based pension together
A lifetime pension counts towards the transfer balance cap at 16 times its annual entitlement. If the two together go over your personal cap, the ATO says you may need to commute the account-based pension and be liable for excess transfer balance tax.
Common questions
Is a defined benefit pension tax-free after 60?
From 60, the taxed element and tax-free component are not assessable income. For capped defined benefit income streams that holds up to the defined benefit income cap, and 50% of that income above the cap is assessable. An untaxed element is assessable at your marginal rate, with a capped 10% tax offset from 60.
What is the defined benefit income cap for 2026-27?
It is $131,250 for 2026-27, which is the $2.1 million general transfer balance cap divided by 16. It was $125,000 for 2025-26, and it may be reduced in some circumstances, such as turning 60 or starting your first capped defined benefit pension part-way through the year.
What happens if my defined benefit pension is above the income cap?
If you are 60 or over, 50% of taxed-element and tax-free income above the cap is included in your assessable income. An untaxed element stays fully assessable, and the 10% tax offset only applies to untaxed income that fits under the cap after taxed-element and tax-free income is counted.
How much is the tax offset on an untaxed defined benefit pension?
The offset is 10% of the untaxed element, available from 60 or earlier for some death benefit income streams. It is capped at 10% of the defined benefit income cap, which is $13,125 for 2026-27, and it is reduced if your total capped defined benefit income is over the cap, with taxed-element and tax-free income counted against the cap first.
How does a lifetime defined benefit pension count towards the transfer balance cap?
Your fund reports a special value to the ATO, which for a lifetime pension is the annual entitlement multiplied by 16. That value is credited to your transfer balance account and counts towards your personal transfer balance cap.
How are untaxed super lump sums taxed after 60?
The untaxed element is taxed at your marginal rate or 17%, whichever is lower, including Medicare levy, up to the untaxed plan cap for that fund ($1,935,000 for 2026-27, less the untaxed element of lump sums already received from it). Amounts above the cap are taxed at the top marginal rate, and the cap applies separately to each super fund.
Sources: ATO, Tax on super benefits; Super income stream tax tables; Retirement withdrawal: lump sum or income stream; Transfer balance cap: capped defined benefit income streams; Schedule 13 tax table for superannuation income streams (supporting information, Parts B and C); Key superannuation rates and thresholds (transfer balance cap and payments from super), all read 14 September 2026; ART's Defined Benefit Account Guide, Australian Government Actuary military superannuation schemes 2023 and QSuper actuarial investigation as at 30 June 2024, checked 28 July 2026.
Great Advice is not affiliated with, or endorsed by, QSuper, Australian Retirement Trust, CSC or any other superannuation fund. This guide is not tax advice. This is general information only and does not consider your objectives, financial situation or needs. Before acting on it, consider whether it is appropriate for your circumstances. George Iacovou is an authorised representative of Akumin Financial Planning Pty Ltd, AFSL 232706.
