Starting a pension is the point where an SMSF stops being a savings vehicle and starts paying you. It's also where most SMSF compliance problems begin. The rules aren't hard, but they're unforgiving: miss a minimum payment, start a pension with the wrong paperwork or forget a report to the ATO, and the fund can lose its tax exemption for the whole year.
This guide explains how SMSF pensions work for 2026–27: when you can start one, how the minimum drawdown is calculated, how the transfer balance cap limits what goes into pension phase, how the tax works, and the mistakes we see most. It's general information. Whether you should start a pension, and what kind, is financial product advice that comes from a licensed financial adviser. We work alongside them and handle the accounting, tax and reporting.
When can you start a pension from your SMSF?
You can start a pension once you've met a condition of release and your fund's trust deed allows it. The common ones:
- Retirement after reaching your preservation age. For anyone born after 30 June 1964, preservation age is 60. Retirement has a specific meaning in super law, so check it fits your facts.
- Turning 65, whether or not you've stopped working.
- Ceasing an employment arrangement after turning 60, even if you keep working elsewhere.
- Permanent incapacity or terminal medical condition.
- Reaching preservation age while still working, which allows a transition to retirement income stream (TRIS) only.
The two pensions most SMSFs pay
| Account-based pension (retirement phase) | Transition to retirement pension (TRIS, before retirement) | |
|---|---|---|
| Who can start it | Members who've met a full condition of release | Members at preservation age (60) who are still working |
| Minimum each year | Age-based, 4% to 14% | 4% |
| Maximum each year | None | 10% of the balance |
| Lump sums allowed | Yes | Generally no, until a full condition of release is met |
| Tax on fund earnings | Generally exempt | Taxed at 15%, as in accumulation |
| Counts towards transfer balance cap | Yes | No, until it moves to retirement phase |
A TRIS moves into retirement phase automatically when you turn 65. If you meet another condition of release earlier, such as retiring, you need to tell the trustee in writing. Until you do, the fund keeps paying tax on the earnings.
How do you start an account-based pension in an SMSF?
The steps are short, but each one needs a document behind it. The auditor will ask for them.
- Confirm the condition of release and keep evidence, such as a signed retirement declaration.
- Check the trust deed allows account-based pensions, reversionary nominations and the payment options you want.
- Value the fund at the start date. Listed assets are easy. Property and unlisted assets need a supportable market value.
- Member request and trustee minute. The member asks in writing to start the pension. The trustee resolves to start it, recording the start date, the starting balance, the minimum for the year and any reversionary beneficiary.
- Calculate the tax components. The tax-free and taxable proportions are fixed on the start date and stay fixed for the life of that pension. That matters later for death benefits.
- Check transfer balance cap space in ATO online services. Your personal cap may differ from the general cap.
- Lodge the TBAR (transfer balance account report) to report the new pension. For SMSFs this is due 28 days after the end of the quarter in which the pension started.
- Set up the payments and make sure the minimum lands in your bank account by 30 June.
Key point: A reversionary beneficiary has to be nominated when the pension starts, in the pension documents. You can't add one later without restarting the pension. If you want the pension to continue automatically to your spouse, decide before it begins. Our guide to binding death benefit nominations explains how reversionary pensions and nominations interact.
What is the SMSF minimum pension for 2026–27?
Your minimum is your pension balance multiplied by an age-based percentage. For 2026–27 the factors are the standard ones that have applied since 2023–24.
| Your age on 1 July 2026 (or on the start date, if the pension starts during the year) | Minimum percentage |
|---|---|
| Under 65 | 4% |
| 65 to 74 | 5% |
| 75 to 79 | 6% |
| 80 to 84 | 7% |
| 85 to 89 | 9% |
| 90 to 94 | 11% |
| 95 or older | 14% |
How it's worked out:
- Balance: the pension account balance on 1 July 2026, or on the start date for a new pension.
- Age: your age on 1 July. Turning 75 in March doesn't change this year's percentage. It changes next year's.
- Pro-rating: a pension that starts after 1 July has its first-year minimum reduced by the days remaining in the year, divided by 365 (366 in a leap year).
- June starts: a pension that starts on or after 1 June has no minimum for that first year.
- Rounding: the result is rounded to the nearest $10, with amounts ending in exactly $5 rounded up.
- Market moves: a fall in the balance during the year doesn't reduce this year's minimum. It's set on 1 July.
Worked example: a couple starting pensions mid-year
Hypothetical, 2026–27.
Maria turns 66 in August 2026 and Tom is 63 and retired. Their SMSF starts an account-based pension for each of them on 1 October 2026: Maria's with $900,000, Tom's with $600,000.
| Maria | Tom | |
|---|---|---|
| Starting balance | $900,000 | $600,000 |
| Age on start date | 66 | 63 |
| Percentage | 5% | 4% |
| Full-year minimum | $45,000 | $24,000 |
| Days from 1 October 2026 to 30 June 2027 | 273 | 273 |
| 2026–27 minimum (pro-rated, rounded) | $33,660 | $17,950 |
| 2027–28 minimum | 5% of 1 July 2027 balance | 4% of 1 July 2027 balance |
Both pensions are well under the $2.1 million general cap, so there's room left in each person's transfer balance cap if more money moves into pension phase later.
What happens if the minimum pension isn't paid?
Get this wrong and the consequences are out of proportion to the mistake. If a pension doesn't pay its minimum, it's treated for income tax purposes as having stopped at the start of that financial year. The fund loses the tax exemption on the earnings from the assets supporting that pension for the whole year, and the payments you did receive are treated as lump sums rather than pension payments. The trustee then has to report the pension as ceased and start a new one if the member wants to keep drawing an income.
There is a narrow exception. The ATO accepts that the pension continued if all of these are true:
- the shortfall was caused by an honest mistake and was no more than one-twelfth of the minimum, or it was caused by something outside the trustee's control
- the pension would otherwise have qualified for the tax exemption
- once the trustee became aware, a catch-up payment was made as soon as practicable (generally within 28 days)
- the catch-up payment is treated as a payment for the year that was short.
You can only rely on this by self-assessment once. After that, the trustee must write to the ATO and ask. Read the conditions on the ATO's page on the exception to minimum pension payment requirements.
Watch out: The minimum has to arrive by 30 June. A transfer made on Friday 27 June that clears on Tuesday 1 July misses the year. We suggest making the final payment by mid-June.
Is an SMSF pension tax-free?
Mostly, but there are two separate questions: tax on what you receive, and tax on what the fund earns.
What you receive. Pension payments from a taxed fund like an SMSF are tax-free once you're 60 or older, and you don't include them in your tax return. Most SMSF pensioners fall in this group. Different rules apply to some death benefit pensions paid to people under 60.
What the fund earns. Income and capital gains on assets supporting a retirement-phase pension are exempt from tax. This is called exempt current pension income (ECPI). The fund claims it in one of two ways:
| Method | When it applies | What you need |
|---|---|---|
| Segregated | Specific assets are set aside solely to support pensions, or the whole fund is in retirement phase all year | Clear records of which assets are segregated |
| Proportionate | Fund has a mix of pension and accumulation balances during the year | An actuarial certificate showing the exempt proportion |
If any member had a total super balance over $1.6 million on the previous 30 June and was receiving a retirement-phase pension, the fund generally can't use the segregated method and must use the proportionate method with an actuary's certificate.
Three limits on the exemption:
- A TRIS isn't in retirement phase, so its earnings are taxed at 15% like accumulation.
- Non-arm's length income is taxed at 45% even in pension phase. See our guide to NALI and NALE.
- Division 296 can apply to members with total super balances above $3 million, and it counts pension-phase earnings too. See our Division 296 guide.
How does the transfer balance cap work?
The transfer balance cap limits how much you can move into retirement phase over your lifetime. It isn't a cap on your super balance, and it isn't reduced by pension payments or by investment losses.
- The general cap is $2.1 million for 2026–27 (it was $2 million in 2025–26).
- Your personal cap is set when you first start a retirement-phase pension. If you started one before 1 July 2026, your cap is somewhere between your original cap and $2.1 million, depending on how much of your cap you'd used. ATO online services shows your figure.
The ATO tracks this through your transfer balance account:
| Credits (use up cap space) | Debits (free up cap space) |
|---|---|
| Starting a retirement-phase pension (the starting balance) | Commuting all or part of a pension to a lump sum or back to accumulation |
| A TRIS moving into retirement phase (balance at that date) | Certain payments made because of family law splits, fraud or bankruptcy |
| A reversionary pension you receive (credited 12 months after the death) | Structured settlement and other specific events |
Note what isn't a debit: regular pension payments and market falls. If your pension started at $1.9 million and has since dropped to $1.4 million, your transfer balance is still $1.9 million.
If you exceed your cap, the ATO issues a determination. You must commute the excess plus notional earnings, and you pay excess transfer balance tax: 15% of the notional earnings for a first breach and 30% for later breaches.
TBAR deadlines for SMSFs
| Event | When the TBAR is due |
|---|---|
| Pension starts, partial or full commutation, TRIS moves to retirement phase | 28 days after the end of the quarter in which it happened |
| Reversionary pension to a surviving spouse | Report with the date of death; the credit applies 12 months later. Report early so the beneficiary can plan |
| Commutation made voluntarily in response to an excess transfer balance determination | 10 business days after the end of the month of the commutation |
| Response to an ATO commutation authority | Within 60 days of the authority being issued |
Lodge late and the ATO can apply penalties. More importantly, the member's cap position is wrong until you do.
Can you take lump sums, or pay the pension in shares or property?
Lump sums. From an account-based pension, yes. A lump sum is a commutation: a debit to your transfer balance account, reportable on the TBAR. Since 1 July 2017, partial commutations don't count towards the minimum. If your minimum is $40,000 and you take a $100,000 lump sum in August, you still need $40,000 in regular pension payments by 30 June.
Before any lump sum, check that enough stays in the pension to pay the rest of the year's minimum. Commuting the whole pension? Pay the pro-rated minimum up to the commutation date first, then commute.
Paying in assets (in specie). Regular pension payments, including the minimum, must be paid in cash. An asset transfer can't count towards the minimum. If the deed allows, the fund can transfer shares or other assets to you as a lump sum commutation instead, at market value. That still needs the cash minimum paid separately, a valuation and a TBAR debit.
Property-heavy funds. If most of the fund is in a single property, plan the cash flow for minimum payments years ahead. Rent may not cover them, especially as the percentage rises with age. Our guide to SMSF property covers liquidity planning.
Pension, accumulation or lump sum: which suits which situation?
There's no single right answer. This is the general pattern we see; your licensed adviser makes the recommendation for you.
| Situation | What's usually worth looking at |
|---|---|
| Retired, 60 or older, balance under your transfer balance cap | Moving the whole balance to pension phase, for tax-free earnings |
| Balance above your cap | Pension up to the cap, the rest stays in accumulation (taxed at 15%) or comes out |
| Still working at 60 to 64 | A TRIS mainly makes sense to fund salary sacrifice or reduce hours. The earnings tax saving is gone |
| Want your spouse to keep the pension running if you die | A reversionary nomination at the start, coordinated with any BDBN |
| Adult children will inherit, not your spouse | Consider the death benefit tax on the taxable component now. See death benefit nominations |
| Facing business debts or possible bankruptcy | Get legal advice before starting a pension. Pension payments to a bankrupt can be caught by income contribution rules, while lump sums received after bankruptcy are generally protected |
| Total super balance near or above $3 million | Model Division 296 before deciding what stays in super |
Mistakes we see with SMSF pensions
- Minimum paid late or short, usually because the last payment was left until 30 June.
- Counting a lump sum towards the minimum. It doesn't count.
- Paying the minimum in shares or by journal entry instead of cash to the member's account.
- No paperwork at the start: no member request, no trustee minute, no valuation.
- TRIS earnings claimed as exempt before the member told the trustee they'd retired, or a TRIS still treated as capped at 10% after the member turned 65.
- TBARs not lodged, so the member's cap position at the ATO is wrong.
- Using the segregated method when a member's balance meant the fund needed an actuarial certificate.
- Contributions added to a running pension instead of to a separate accumulation account.
- Reversionary nomination missed at the start, then a will or BDBN that contradicts what the family expected.
- Lumpy property funds with no cash for rising minimums in their 80s.
How BPAG helps with SMSF pensions
We prepare SMSF financial statements, member statements and the annual return, and coordinate the independent audit with an approved SMSF auditor. Pensions are part of that work all year, not just at tax time. See our SMSF accounting and audit service.
- Before the pension starts: we check the deed, value the fund, calculate the minimum and tax components, and prepare the trustee documents for your sign-off.
- During the year: we track payments against the minimum, so a shortfall is caught in May, not after 30 June.
- Reporting: we lodge TBARs on time and reconcile the ATO's transfer balance record against the fund.
- Year end: we arrange the actuarial certificate where one is needed and claim the exemption correctly.
Our super and SMSF agent works through the minimum, pro-rating, cap space and TBAR events for each member; your accountant checks the result and explains it to you. Agents draft, qualified accountants review and sign off, and nothing reaches you or the ATO without a person approving it.
Whether to start a pension, how much to draw, and whether to take lump sums are financial product decisions. A licensed financial adviser (AFSL holder) makes those recommendations. We work with your adviser, or can introduce one. Starting from scratch? Read our self managed super fund guide first.
Frequently asked questions
Can I add money to an SMSF pension after it has started?
No. Once an account-based pension starts, its capital is fixed. New contributions go to an accumulation account. To combine them, you'd commute the pension (or part of it) back to accumulation and start a new pension with the larger balance, which recalculates the tax components and creates a new transfer balance cap credit.
Can I have more than one pension in my SMSF?
Yes. Many members run two or more pensions, for example one started from after-tax contributions and one from the rest, to keep tax components separate for estate planning. Each pension must meet its own minimum, and each start date is a separate transfer balance cap credit.
Do I need a product disclosure statement or a new trust deed to start a pension?
An SMSF doesn't issue a PDS to its own members in the way a public fund does, but your trust deed must allow the type of pension you want, including reversionary nominations and in-specie lump sums. Older deeds sometimes don't. Have the deed checked before the pension starts, not after.
How often do SMSF pension payments have to be made?
At least once a year, by 30 June. You can choose monthly, quarterly or a single annual payment, and you can change the amount during the year as long as the minimum is paid in total. The money must reach your account by 30 June, so don't leave it to the last day.
Does my SMSF pension count for Centrelink?
Usually yes. Account-based pensions are counted under the assets test and are generally deemed under the income test. Older pensions started before 1 January 2015 may have kept earlier treatment if they haven't been changed. Check before you restart or consolidate an old pension.
What is a transition to retirement pension in an SMSF?
It's a pension you can start once you reach preservation age (60) while still working. You can draw between 4% and 10% of the balance each year, but the fund pays tax on its earnings as if the money were still in accumulation. It moves into retirement phase, with tax-free earnings, once you turn 65 or tell the trustee you've met another condition of release such as retirement.
Official sources
General information only, current as at 18 October 2026. It is not personal tax, legal or financial product advice and doesn't take your circumstances into account. Talk to us before you act. Where a recommendation needs a licensed financial adviser or a solicitor, we work alongside them.