SMSF Pension Guide

Preservation age is the earliest age at which a member can access their super. It determines when a transition to retirement pension becomes available.

For anyone born on or after 1 July 1964, preservation age is 60. For those born before this date:

When a member meets a full condition of release, they can roll some or all of their super balance into an account-based pension. Key features:

• The pension account remains invested and continues to earn returns
• Investment earnings on pension-phase assets are tax-free via ECPI (see Section 05)
• A minimum amount must be withdrawn each year based on age (see Section 03)
• There is no maximum withdrawal limit
• Pension payments are tax-free for members aged 60 and over
• For members aged 55-59, pension payments from a taxed source are taxed at marginal rates with a 15% tax offset

A pension is usually used when the member wants ongoing retirement income and potential ECPI on supporting assets. A lump sum is usually used for a one-off cash need, estate planning restructure, or transfer balance cap correction.

For members aged 60 and over, both pension payments and most super lump sums from a taxed fund are generally tax-free personally. The bigger difference is often fund tax, cash flow, Centrelink treatment, investment strategy, and whether a commutation is needed to adjust the member's transfer balance account.

A reversionary pension automatically continues to a nominated beneficiary (typically a spouse) on the member's death, rather than being cashed out. Key features:

• The nomination is made at the time the pension is established, not at death
• The reversionary beneficiary receives the pension without any compliance action required by the trustee at the time of death
• The reversionary beneficiary's transfer balance account is credited 12 months after the member's death, not immediately - this gives time to restructure if needed
• Only dependants can be nominated as reversionary beneficiaries

The minimum payment is calculated as a percentage of the account balance at:

• 1 July of the financial year, for pensions already in place at the start of the year
• The commencement date, pro-rated to 30 June, for pensions starting mid-year

The percentage is determined by the member's age at 1 July (or at commencement for new pensions). The standard rates below apply for FY2025-26.

The ATO has a limited exception for honest mistakes or matters outside the trustee's control. A small underpayment can generally be self-assessed only if all ATO conditions are met, the shortfall is no more than one-twelfth of the required minimum, and the catch-up payment is made as soon as practicable, generally within 28 days of discovery.

If those conditions are not met, or the fund has used the exception before, trustees need to write to the ATO with evidence and ask for the exception. The ATO's exception to minimum pension payment requirements guidance sets out what to include.

Once a member meets a full condition of release (most commonly, retiring after reaching preservation age, or turning 65), the TTR pension can be converted to a retirement-phase account-based pension. At that point:

• The 15% earnings tax no longer applies - earnings become tax-free
• The 10% maximum drawdown restriction falls away
• Lump sum withdrawals become available
• The pension balance counts toward the transfer balance cap

The conversion requires a trustee resolution and documentation. It is not automatic.

The tax advantage of a TTR pension narrowed significantly after 1 July 2017 when the earnings tax changed from 0% to 15%. The common pre-2017 strategy of drawing a pension while salary sacrificing at maximum levels is now less compelling.

Legitimate uses of a TTR pension today include:

• Supplementing income during reduced working hours without drawing on other savings
• Bridging income between reaching preservation age and meeting a full condition of release
• Where the member's personal income tax rate substantially exceeds 15% and pension payments carry the 15% tax offset

When a member is in retirement phase, the income and capital gains from assets supporting that pension are exempt from tax inside the fund. ECPI covers:

• Interest income
• Dividends (and franking credits remain refundable even where the fund has no tax liability)
• Rental income
• Capital gains, both discounted and non-discounted

ECPI does not apply to TTR pension assets or to assets supporting accumulation-phase member balances.

Segregated method:

Specific assets are identified as supporting pension liabilities. All income and gains from those assets are 100% exempt. No actuarial certificate is required.

Applies when: all fund members are in full retirement phase for the entire financial year (in most circumstances) AND no member has a defined benefit interest. Funds with any accumulation-phase member balances at any point during the year generally cannot use the segregated method.

Proportional (unsegregated) method:

An actuary calculates the proportion of the fund's income that is exempt, based on the ratio of pension-phase assets to total assets throughout the year. The exempt proportion is applied to all fund income.

Applies when: the fund has a mix of accumulation and pension-phase members, or where any member has a defined benefit interest. An actuarial certificate is required each year the proportional method is used.

The general transfer balance cap for FY2025-26 is $2M. This is the maximum amount a member can transfer into retirement-phase pensions over their lifetime.

• The cap applies at the individual level, not the fund level
• It is tracked through each member's personal Transfer Balance Account (TBA)
• Exceeding the cap results in an excess transfer balance, which attracts tax on notional earnings
• The general cap is indexed to CPI in $100,000 increments

Each individual's personal transfer balance cap depends on when they first entered retirement phase:

• Members who have never entered retirement phase: personal cap equals the current general cap ($2M)
• Members who first entered retirement phase when the cap was lower (e.g. $1.6M in 2017 or $1.7M in 2021): their personal cap may be proportionally higher, but is unlikely to equal the current general cap
• The personal cap is calculated using an ATO formula based on the highest balance ever recorded in the transfer balance account

Members who commenced pensions in earlier years should check their personal cap through ATO Online Services via myGov rather than assuming it equals the current general cap.

Credits (amounts that count toward the cap):

• Retirement-phase pension commencement - the value of the pension at the date it commences
• Reversionary death benefit pensions - credited 12 months after the date of death (see Section 08)
• Defined benefit scheme payments in some circumstances

Debits (amounts that reduce the cap space used):

• Commutations (full or partial) of a retirement-phase pension
• Structured settlement contributions
• Excess transfer balance tax payments

If a member's transfer balance account exceeds their personal cap:

1. The ATO issues an excess transfer balance determination
2. The member must commute (remove) the excess from pension phase - back into accumulation or out of the fund entirely
3. Tax on notional earnings applies from the date of excess, at 15% (or 30% for repeated breaches)
4. The longer the excess remains unaddressed, the larger the tax liability grows

For members aged 60 and over who have met a full condition of release, lump sum commutations are generally tax-free.

For members under 60, the taxable component of a commuted lump sum is taxed at a maximum of 20% (plus Medicare levy) up to the low rate cap ($260,000 for FY2025-26), and at marginal rates above the cap.

A full or partial commutation of a retirement-phase pension is a reportable event under the Transfer Balance Account Report (TBAR) framework. It must be reported to the ATO within 28 days of the end of the quarter in which the commutation occurred.

A debit is recorded in the member's transfer balance account, freeing up cap space for future pension commencements if needed. See the SMSF Compliance Calendar for quarterly TBAR due dates.

Child pensions (other than to children with a permanent disability) must be fully commuted once the child turns 25.

Trustees often ask whether to use a reversionary pension nomination or a binding death benefit nomination (BDBN). These serve different purposes and can work together.

A reversionary pension is established when the pension commences. It automatically continues to the nominated beneficiary without any trustee decision at death. The beneficiary's transfer balance account is credited 12 months after the member's death.

A BDBN directs the trustee to pay the death benefit to a nominated person. It applies to the lump sum value of any pension that is not reversionary, or to accumulation balances. BDBNs must generally be renewed every 3 years unless the trust deed provides for non-lapsing nominations.

Many funds use both: a reversionary pension for the ongoing income stream, and a BDBN for any remaining accumulation balance or non-reversionary components. This combination provides the clearest and most complete instructions to the trustee.