Running an account-based pension from your self-managed super fund (SMSF) comes with one deceptively simple obligation: you must pay yourself at least a minimum amount every financial year. Miss it, and the reward that makes pensions so attractive — the tax exemption on the fund's Investment Earnings — can vanish for the entire year. That is a large penalty for what is often an administrative slip. But the outcome is not always catastrophic, because the ATO provides a narrow concession for genuine mistakes. Understanding both the risk and the relief is essential for every SMSF pensioner ATO income stream rules.

The minimum payment rule

Once your SMSF is paying you a retirement-phase account-based pension, it must pay at least a minimum amount each year. The minimum is a percentage of your pension Account Balance at 1 July (or at commencement), set by your age: 4% under 65, 5% for 65–74, 6% for 75–79, 7% for 80–84, 9% for 85–89, 11% for 90–94, and 14% at 95 or over ATO income stream rules. The amount is rounded to the nearest $10, and in the first year it is pro-rated for the number of days the pension runs. These are the standard rates that returned from the 2023-24 year after the temporary COVID-era halving ended.

What is actually at risk: the earnings exemption

The key thing the minimum protects is the fund's earnings tax exemption. Earnings on Assets supporting a retirement-phase pension are exempt from tax — this is exempt current pension income, or ECPI ATO exempt current pension income. If you Fail to pay the minimum, the super income stream is treated as having ceased at the start of that income year for tax purposes. The consequence is that the fund loses the ECPI exemption for the year, so earnings on those assets are taxed at up to 15% instead of being exempt, and payments already made in the year are treated as lump sums rather than pension payments ATO income stream rules.

It is important to separate two different taxes here. This rule is about tax on the fund's investment earnings, not about tax on the money you receive. For a member aged 60 or over, benefits are generally tax free to you personally whether they are called pension payments or lump sums. The damage from a missed minimum falls on the fund's earnings exemption for the year — which is exactly the benefit most retirees start a pension to obtain.

Not every shortfall has the same outcome

Crucially, missing the minimum does not automatically and irreversibly cost you the exemption. The Commissioner has a general power, and the ATO allows trustees to self-assess a limited exception, so that the pension is treated as continuing despite the underpayment ATO exception to minimum pension payments. This is why it is wrong to assume every shortfall ends the same way; the outcome depends on the size of the shortfall and the circumstances.

When the exception can apply

Under the ATO's self-assessment approach, all of the following must be satisfied: the underpayment resulted from an honest mistake and is small — not more than one-twelfth of the minimum for the year — or was due to matters outside your control; the income stream was in retirement phase and would have kept the ECPI exemption had the minimum been paid; you make a catch-up payment as soon as practicable after realising the shortfall (generally within 28 days); and that catch-up would have met the standard if made in the prior year ATO exception to minimum pension payments. The honest-mistake version can generally be relied on only once — if you have self-assessed the exception before, you cannot use it again. Larger shortfalls, or repeated ones, generally require an application to the Commissioner and are not guaranteed relief.

A hypothetical example

Hypothetical: Helen, 68, has a pension balance of $500,000 at 1 July 2026, giving a minimum of $25,000 (5%). Her adviser retires and, in the changeover, she pays only $23,000 by 30 June — a shortfall of $2,000. Because one-twelfth of $25,000 is about $2,083, her $2,000 shortfall is within the small-shortfall threshold, it was an honest mistake, and she pays the missing $2,000 within a fortnight of noticing. If she has not used the exception before, Helen can self-assess that the pension continued, preserving the earnings exemption. Had she instead simply forgotten to draw anything at all, or the shortfall been larger, the pension could be treated as having ceased on 1 July 2026, exposing a year of fund earnings to tax.

The knock-on effects of a lost exemption

When a pension is treated as having ceased because the minimum was missed, the effects ripple beyond a single year's tax. Payments made during the year become lump sums, which can interact with your transfer balance account and, if you later restart the pension, require it to be re-established and re-reported to the ATO ATO income stream rules. The assets that had been supporting the pension revert to accumulation for the year, so any realised capital gains on them during that period are no longer exempt. For a fund with substantial earnings, one missed payment can therefore turn a zero-tax year into a materially taxed one. This is why the minimum is best treated as a hard deadline rather than a target to hit if convenient.

How to avoid the problem

Prevention is straightforward. Recalculate the minimum against the 1 July balance each year, diarise a pension payment well before 30 June (not on the last day, when a bank delay can push it into July), and keep the cash to fund it — an SMSF that is asset-rich but short of Liquidity can struggle to pay the minimum on time. Trustees should document each year's minimum calculation and the payments made ATO valuation guide. If you do fall short, act immediately: identify the cause, make the catch-up payment quickly, and record whether the exception conditions are met. The minimum pension rule is unforgiving of neglect but reasonably forgiving of honest, promptly corrected error. Treating it as a fixed annual task rather than an afterthought keeps your fund's earnings exemption safe, and builds a clean compliance record that makes the annual audit and the fund's dealings with the ATO far smoother.