Key Highlights

•  If a pension starts after 1 July the first-year minimum is pro-rated, and if it starts on or after 1 June no minimum is required for that year.

•  The ATO says the minimum payment must generally be paid before a full commutation, and partial commutations need enough assets left to pay it.

•  If the minimum is not met, the ATO treats the pension as having ceased at the start of the year, and the fund cannot claim exempt current pension income.

Account-based pensions are the engine room of many retirement-phase SMSFs. The rules for minimum annual payments are familiar when a pension runs for a full financial year, but they become less intuitive when a pension starts in the middle of the year, is commuted, or ends because a member dies or the fund is wound up.

Getting the minimum wrong is not a small matter. The ATO's guidance, last updated on 30 April 2026, explains that a pension that fails the minimum standards can lose its tax-exempt status for the whole year.

The standard minimum

The minimum annual payment is calculated by multiplying the member's pension account balance by an age-based percentage factor. The balance used is the balance at 1 July, or at the start day if the pension commenced during the year. The result is rounded to the nearest $10.

The ATO's percentage factors, which have applied since 2023–24, are:

  • under 65: 4 per cent;
  • 65 to 74: 5 per cent;
  • 75 to 79: 6 per cent;
  • 80 to 84: 7 per cent;
  • 85 to 89: 9 per cent;
  • 90 to 94: 11 per cent; and
  • 95 or more: 14 per cent.

Age is measured at 1 July or at the start day if the pension began during the year.

Pensions that start part way through the year

If a pension starts after 1 July, the minimum for the first year is pro-rated. The ATO's formula multiplies the annual minimum by the number of days remaining in the year, including the start day, and divides by 365, or 366 in a leap year.

There is also a useful exception. The ATO states that if a pension starts on or after 1 June in a financial year, no minimum payment is required for that financial year. Trustees still need to document the commencement properly and meet the minimum in the following year.

The ATO gives an example of a $250,000 pension commencing on 1 January 2023 for a 66-year-old. The full-year minimum is $6,250, and the pro-rated amount for 181 days is $3,099, rounded to $3,100.

Pensions that stop part way through the year

When a pension is fully commuted, the ATO says the minimum amount must generally be paid before the commutation. When a pension is partially commuted, enough assets must remain to pay the minimum. Since 1 July 2017, partial commutation amounts do not count towards the minimum annual payment, which catches some trustees who assume a lump sum withdrawal satisfies the requirement.

Each commutation is a transfer balance cap event that must be reported on a transfer balance account report. The ATO says the report is due 28 days after the end of the quarter in which the event occurs, and that commutations should be requested, documented and recorded in trustee minutes.

When a member dies

Different rules apply on death. For a non-reversionary pension, the ATO says no minimum payment is required in the year of death. For a reversionary pension, the minimum must still be paid. Trustees should check the pension documentation to confirm which type applies.

What happens if the minimum is not met

If the minimum standards are not met, the ATO treats the pension as having ceased at the start of that income year for tax purposes. Payments made are not treated as super income stream benefits, and the fund cannot claim exempt current pension income for that year. To restart a pension, the original income stream must end and a new one must begin, with a fresh valuation, a new minimum calculation and a new transfer balance account report.

The ATO notes that the Commissioner may allow a pension to continue despite a shortfall in limited circumstances, but trustees should not rely on that discretion.

Practical considerations

Trustees can reduce the risk of error by calculating the minimum at the start of each year, scheduling regular payments rather than relying on a single payment in June, and checking the position again before any commutation or wind-up. Cash-flow planning matters too: a fund holding mostly illiquid assets needs enough cash to meet the minimum when it falls due.

Takeaway

Part-year pensions follow clear rules: pro-rate in the first year, nothing required if the pension starts on or after 1 June, pay the minimum before a full commutation and remember that partial commutations do not count. Careful records and early calculations help protect the fund's tax-exempt pension income.