SMSF minimum pension payments: Rules and strategies

Self-managed super funds (SMSFs) are well known for their flexibility when it comes to retirement planning and investing, but when it comes to paying pensions to fund members, there are obligations that must be met from year to year.

If your SMSF has members in retirement phase or planning to retire soon, it’s important to review the fund’s retirement income needs and strategy. This includes ensuring the required minimum pension payments from any account-based pensions are in place.

What is an account-based pension?

Most super pensions these days are account-based pensions, so called because the pension is paid from a super account held in your name. These pensions were previously referred to as allocated pensions.

For SMSFs with account-based pensions, the amount supporting the pension must be allocated to a separate account for each member.

Once you start an account-based pension, minimum annual payments are calculated on your account balance on 1 July each year, multiplied by a percentage factor that increases as you age. This is often referred to as the minimum pension drawdown.

Minimum pension payment rates

Account-based pension recipients are required to withdraw at least the minimum annual pension amount, which is initially calculated on the start date of the pension using the opening balance and your age at the time.

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The minimum annual payment is then recalculated on 1 July each year. To calculate the annual minimum pension amount, your pension balance is multiplied by a percentage factor that increases as you age. The table below shows the minimum pension percentage factor for each age group.

Payments must be received at least annually between 1 July and 30 June each financial year, although many retirees opt to receive monthly or quarterly payments.

The minimum annual payment amount is rounded to the nearest ten whole dollars. If the amount ends in an exact five dollars, it is rounded up to the next whole ten dollars.

Minimum pension payment calculator

Our calculator below estimates your minimum pension payment amount.

Enter your age and pension balance in the yellow fields as at 1 July and the calculator will display your annual minimum pension payment amount for that financial year (1 July to 30 June).

Pension planning tips and strategies

The minimum pension percentage factor increases with the age of the recipient, so you are required to withdraw a higher percentage of your pension balance as you age.

If we refer back to our example above, as Mike will be 75 on 1 July 2026, his minimum pension percentage factor will increase to 6%. If we assume his balance remains at $1 million (after pension payments and earnings), he will be required to draw down at least $60,000 for the 2027 financial year.

So Mike and the other SMSF trustees need to consider this increased pension payment requirement to make sure their SMSF has sufficient cash flow to support higher minimum payments in the future. If not, they may need to review their SMSF investment strategy and allocate more assets to short-term cash investments.

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If we then turn our attention to the outcomes for Mike, he may find that next year’s increased minimum pension payment from his SMSF pension is more than he needs, so he may need to consider his options.

• While Mike is under 75, he can reinvest payments he doesn’t need back into his accumulation account, so long as his total super balance is under the general transfer balance cap. As he is under 75, there is no need to meet a work test to make this type of contribution.
• When Mike is no longer eligible to make super contributions but still wants to keep money in super, he could consider commuting (ceasing) his pension, transferring his pension balance to the accumulation phase and then starting a new pension with a lower balance. A pension with a lower balance also has a lower minimum withdrawal.
• Mike could also consider investing any excess pension payments outside super.

It is also worth noting that most SMSF trust deeds and pension documentation allow you to change the amount of your pension payments during the financial year, provided you meet at least the minimum annual withdrawal requirements.

What if I don’t withdraw the minimum pension amount?

Minimum pension withdrawals are mandated by the government. If you fail to comply, your super pension could lose its tax-free status.

Where the minimum pension amount is not met, the following outcomes will arise:

• The pension would cease at the start of the relevant pension year, so 1 July, for the purposes of determining the fund’s exempt current pension income (ECPI). This would result in all of the fund’s earnings on the assets supporting the pension being taxed at the fund rate for the full year.
• As the pension ceased on 1 July, for tax purposes, any payments that had been made during the year would need to be treated as lump sum payments.
• The pension would cease at the end of the relevant pension year, so 30 June, for transfer balance account reporting (TBAR). Therefore, the deemed balance of the pension at 30 June would be used to determine the effect on your transfer balance account.

If the SMSF member then wants their account back in retirement phase in the next or a later financial year, they will need to ensure that all things necessary are carried out for a new pension to be commenced.

As you can see, the outcomes from failing the minimum pension rules are severe, so SMSF trustees need to be vigilant and arrange for at least the minimum pension payment to be made each year.

Does the minimum drawdown affect my Age Pension?

The amount of Age Pension you receive is determined by the income test and assets test.

The income test is not affected by the amount you withdraw from your super pension, as Centrelink applies the deeming rules to estimate your super pension income.

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However, the assets test includes your total super balance and assets outside super. This presents an opportunity for retirees whose assets are only slightly above the Age Pension threshold, as the more you withdraw from your super, the more Age Pension you may be entitled to receive. 

Why does the government set a minimum payment?

The reason for setting minimum annual payments is to satisfy the sole purpose test. That is, that super (and the generous tax concessions it receives) is designed to provide retirement income and for your balances to eventually run out. It’s not designed as a tax-effective way to transfer wealth to the next generation.

The percentage factor – normally beginning at 4% and rising to 14% as you age – is generally considered a safe amount for retirees to withdraw annually while maintaining an account balance that will keep the income flowing through retirement. As it’s impossible to know how long any individual will live, these amounts are based on the average lifespan for Australians who reach age 65, 75, 80, 85, 90 and 95.

Your super income stream will stop:

• When there’s no money left in the account
• If the minimum annual payment is not made
• If it is commuted (converted) into a lump sum
• When you die, unless you have a dependent beneficiary who is automatically entitled to receive the income stream referred to as a reversionary beneficiary.

There is no maximum annual drawdown other than the balance of your account, unless it is a Transition-to-Retirement (TTR) Pension not in retirement phase. In that case, the maximum annual withdrawal amount is 10% of your pension account balance.

Calculating the first payment

If you start an account-based super pension after 1 July, the minimum amount for the first year is calculated on a pro-rata basis according to the number of days remaining in the financial year, including the start day (see example below).

If your super pension commences on or after 1 June, no payment is required in that first financial year.

The bottom line

It is essential that SMSF trustees plan ahead to ensure they can meet any pension payment obligations. Failing to do so can result in costly and unexpected tax outcomes.

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It will also create additional administrative and accounting tasks, resulting in an increase in the time and expense of running your SMSF.