An SMSF pension is an income stream paid from a self managed super fund once a member meets a condition of release. The two most common types are account-based pensions (ABPs) and transition to retirement income streams (TRIS). Setting up an SMSF pension correctly requires precise documentation, accurate calculations and ongoing compliance with ATO reporting obligations under Division 1A of Part 2 of the Income Tax Assessment Act 1997 and section 82 of the SIS Act. Mistakes in the commencement process carry real tax consequences, including losing the fund’s tax exemption on pension assets entirely.
What’s Included
SMSFcentral’s pension management service covers:
- Pension commencement documentation: preparation of minutes, pension agreements and member notifications
- Transfer balance account reporting (TBAR): lodgement of events with the ATO within 28 days of the end of the quarter (or 10 business days for funds with members above the $1.9M cap)
- Minimum drawdown tracking: calculation of pro-rata minimums for pensions starting part-way through the year
- Reversionary pension nominations: setup and documentation of reversionary beneficiary elections
- Transition to retirement (TTR) income streams: commencement, annual maximum drawdown monitoring and conversion to ABP on meeting a full condition of release
- Commutation and rollback processing: when members need to reduce their transfer balance or commute a pension back to accumulation
- Annual pension payment schedules: making sure the correct amount is paid before 30 June each year
Our Process
- Gather member details. We confirm the member’s age, preservation status, condition of release and existing transfer balance cap usage. Your client provides a certified copy of the trust deed and latest financial statements.
- Calculate entitlements. We determine the member’s available transfer balance cap space (currently $1.9M general cap from 1 July 2023), calculate the tax-free and taxable components and confirm the pro-rata minimum drawdown for the first year.
- Prepare commencement documents. We draft the trustee minutes, pension agreement and member application. For reversionary pensions, we include the reversionary nomination within the pension agreement.
- Segregate pension assets. We identify which fund assets will support the pension and set up the appropriate accounting entries. For funds using the proportionate method, we calculate the exempt current pension income (ECPI) percentage.
- Lodge TBAR events. We report the pension commencement to the ATO via the transfer balance account report. This must be done within 28 days of the end of the quarter in which the pension started, or within 10 business days if the member’s total super balance exceeds $1.9M.
- Set up ongoing payment schedule. We establish the annual payment plan, confirming at least the minimum drawdown is paid by 30 June. For TTR pensions, we also monitor the 10% maximum drawdown cap.
- Year-end reconciliation. At financial year end, we verify all minimum payments were made, reconcile the pension account balance and prepare the pension section of the annual return.
Regulatory Context
SMSF pensions are governed by Division 1A of Part 2 of the Income Tax Assessment Act 1997 and section 82 of the SIS Act. The transfer balance cap (currently $1.9M from 1 July 2023) limits the total amount a member can transfer into the retirement phase across all super funds. Exceeding the cap triggers excess transfer balance tax.
Minimum Drawdown Percentages by Age
The government sets minimum annual pension drawdowns based on the member’s age at 1 July each year:
| Age bracket | Standard minimum |
|---|---|
| Under 65 | 4% |
| 65–74 | 5% |
| 75–79 | 6% |
| 80–84 | 7% |
| 85–89 | 9% |
| 90–94 | 11% |
| 95+ | 14% |
Note: The government temporarily halved these minimums during COVID (2019–20 through 2022–23). The full rates have applied again since 1 July 2023. Always check for any current concessions.
Critical rule: If the minimum is not paid by 30 June, the pension is treated as having ceased on 1 July of that financial year. The fund loses its ECPI tax exemption on pension-supporting assets for the entire year.
Common Pitfalls
The single most common pension compliance failure. If your client’s minimum pension payment is not made by 30 June, the pension is deemed to have never commenced that year. The fund pays 15% tax on all earnings that would otherwise have been exempt. No grace period. No extensions. The ATO is absolute on this point.
Late or inaccurate transfer balance account reports can result in the ATO issuing an excess transfer balance determination. The member then faces excess transfer balance tax at 15% (first breach) or 30% (subsequent breaches) on the notional earnings of the excess amount.
When a member with a TTR income stream meets a full condition of release (such as retirement after reaching preservation age), the TRIS should be converted to an account-based pension. Until conversion, the fund cannot claim ECPI on the assets supporting that income stream. Advisers sometimes overlook this step, costing the fund thousands in unnecessary tax.
A reversionary pension must be established at commencement. You cannot add a reversionary beneficiary to an existing pension after it has started. If the nomination is not included in the original pension documents, the only option on the member’s death is a death benefit pension, which has different transfer balance cap implications for the beneficiary.
Frequently Asked Questions
An account-based pension is available to members who have met a full condition of release, such as retirement after preservation age. A transition to retirement income stream allows members who have reached preservation age but are still working to access their super as a pension. TRIS pensions have a maximum annual drawdown of 10% of the account balance and the supporting assets do not qualify for ECPI until the member meets a full condition of release.
The $1.9M transfer balance cap (from 1 July 2023) applies when a member first commences a retirement-phase income stream. It limits the total amount across all of a member’s super funds, not just their SMSF, that can be transferred into pension phase. Each member has their own personal transfer balance cap, which may be less than $1.9M if they commenced a pension before the cap was indexed.
If the minimum annual pension payment is not made by 30 June, the ATO treats the pension as having failed for the entire financial year. The fund loses its tax exemption on pension earnings and a new pension must be commenced the following year. This also triggers a new TBAR event and may affect the member’s transfer balance cap.
Yes. A member can partially or fully commute their pension at any time by providing a written request to the trustee. The commuted amount returns to the accumulation phase. This is commonly done to free up transfer balance cap space. For example, a member wants to commence a new pension from a different super fund.
When a member with a reversionary pension dies, the pension automatically continues to the nominated reversionary beneficiary. The beneficiary has 12 months from the date of death to make adjustments if the reversionary pension causes them to exceed their personal transfer balance cap. The pension counts against the beneficiary’s cap at the date of death, not the original commencement value.
Yes. The same age-based minimum drawdown percentages apply to TTR pensions. However, TTR pensions also have a maximum drawdown cap of 10% of the account balance at 1 July. A TTR pension for a member aged 60 must pay between 4% (minimum) and 10% (maximum) of the opening balance.
Related Solutions
- SMSF Contributions Administration: cap monitoring and contribution classification before pension phase
- SMSF Trust Deed Updates: ensure your deed supports pension commencement and reversionary nominations
- SMSF Wind-Up: pension commutation and fund closure when winding up
Start or Transfer a Pension
Call 02 8412 0086 or email [email protected]. We handle the documentation, calculations and ATO reporting. You keep advising.
Set up of recurring pension payments.
Arrangement of adhoc additional pension payment.
Management of pension minimums to ensure they are met each year.
Transition to retirement: management of pension maximums.
Pension Establishments, including Reversionary Pensions and Death Benefit pensions.
Pension Commutations.