Pension standards for self-managed super funds

This information explains the pension standards that apply to self-managed super funds (SMSFs) in relation to account-based pensions – also known as a super income stream.

Read more about SD 2004/1 Superannuation: can a self-managed superannuation fund provide a defined benefit pension?

Account-based pensions

An account-based pension is an income stream paid from a super account held in the member's name. The amount supporting the pension must be allocated to a separate account for each member.

There are limited circumstances in which SMSFs can pay non-account-based pensions to members.

Pension commencement day

A pension's commencement day is the first day of the payment period. For example, if a pension is paid fortnightly, it will commence on day one of the 14-day payment period.

Funds generally determine the frequency of payments.

Pensions commenced before 1 July 2007

For pensions that commenced before 1 July 2007, the SMSF must continue to pay them under the previous pension payment standards, unless the pension is an allocated pension.

For allocated pensions, the SMSF can choose to start paying under the minimum standards any time after 1 July 2007 without having to commute and start a new pension, provided this is permitted by the rules of your fund.

Pensions commenced between 1 July and 19 September 2007

Pensions that commenced between 1 July 2007 and 19 September 2007 may be paid under the previous or the new pension rules, provided this is permitted by the rules of your fund.

Pensions commenced on or after 20 September 2007

All pensions that commence on or after 20 September 2007 must meet the minimum pension standards.

Minimum pension standards

Pensions that SMSFs pay must satisfy all of the following minimum standards:

• The pension must be account-based, except in limited circumstances.
• You must pay a minimum amount at least once a year. From 1 July 2017, partial commutation payments do not count towards minimum annual pension payments.
• Once the pension has started, you cannot increase the capital supporting the pension using contributions or rollover amounts.
• Where a member dies, their pension can only be transferred to a dependant beneficiary of that member.
• You cannot use the capital value of the pension or the income from it as security for borrowing.
• Before you can fully commute a pension, you must pay a minimum amount in certain circumstances.
• Before you partially commute a pension, you must make sure there are sufficient assets to pay the minimum amount, if you haven't already done so.

All pensions that satisfy the minimum standards will generally be treated as super income stream benefits for income tax purposes. This means the fund may be able to claim an exemption for the income earned on pension assets, called an exempt current pension income (ECPI).

If the minimum pension standards are not met, the payments will not be treated as super income stream benefits.

Failing to meet the minimum pension payment standards for an income stream now not only means the fund loses ECPI for the income year, but that there are also transfer balance account consequences. These include:

• the credit that arose when the member started the income stream remains in the individual's transfer balance account
• the trustee must report to us the date that the super income stream ceases to be in the retirement phase for transfer balance cap purposes. This creates a debit in the individual's transfer balance account at that time. The value of that debit is the value of the super interest which that supports the income stream just before it stopped being a super income stream. In most cases, this will not equal the original credit, due to payments made over time

There are limited circumstances in which the Commissioner of Taxation's general administrative powers may allow a pension to continue even though the minimum pension standards have not been met. See SMSFs: Minimum pension payment requirements – frequently asked questions.

Find out about withdrawing your super and paying tax.

Read more about relevant superannuation law LCR 2016/9 Superannuation reform: transfer balance cap.

How to calculate the minimum annual payment

The SMSF must pay a minimum amount each year to a member from their pension account.

The minimum annual payment amount is worked out by multiplying the member’s pension account balance by a percentage factor. The amount is rounded to the nearest 10 whole dollars. If the amount ends in an exact five dollars, it is rounded up to the next 10 whole dollars.

The following table shows the relevant percentage factor based on the member’s age. In response to the downturn in global financial markets, the government provided pension drawdown relief in 2008–09, 2009–10 and 2010–11. This relief was extended in 2011–12 and 2012–13. The minimum payment amount returned to normal in 2013–14.

Temporarily reducing superannuation minimum payment amounts

For the 2019–20, 2020–21, 2021–22 and 2022–23 income years, minimum superannuation payment requirements for account-based pensions and similar products were reduced by 50%. This reduction has not been extended for the 2023–24 income year and onwards.

Minimum percentage of account balance factors, by age

Age	2007–08 income year	2008–09 to 2010–11 income years (inclusive)	2011–12 and 2012–13 income years (inclusive)	2013–14 to 2018–19 income years (inclusive)	2019–20 to 2022–23 income years (inclusive)	2023–24 income year
Under 65	4.0%	2.0%	3.0%	4.0%	2.0%	4.0%
65–74	5.0%	2.5%	3.75%	5.0%	2.5%	5.0%
75–79	6.0%	3.0%	4.5%	6.0%	3.0%	6.0%
80–84	7.0%	3.5%	5.25%	7.0%	3.5%	7.0%
85–89	9.0%	4.5%	6.75%	9.0%	4.5%	9.0%
90–94	11.0%	5.5%	8.25%	11.0%	5.5%	11.0%
95 or more	14.0%	7.0%	10.5%	14.0%	7.0%	14.0%

The member's age is determined at either:

• 1 July in the financial year in which the payment is made, or
• the commencement day of the pension or annuity, if that is the year in which it commences.

Account balance means one of the following:

• the pension account balance on 1 July in the financial year in which the payment is made
• the balance on the pension commencement day, if the pension commenced during the financial year
• the amount of the withdrawal benefit, if the amount of the pension account balance is less than the withdrawal benefit that the member would be entitled to if the pension were to be fully commuted.

Where the pension commences after 1 July, the minimum payment amount for the first year is calculated proportionately to the number of days remaining in the financial year, starting from the commencement day.

To calculate the minimum payment amount, multiply the minimum annual payment amount by the remaining number of days in the financial year and divide by 365 (or 366 in a leap year). This is expressed as:

Minimum payment amount = minimum annual payment amount × (remaining number of days ÷ 365 (or 366)).

If the pension commences on or after 1 June in a financial year, no minimum payment is required to be made for that financial year.

What you need to do

As an SMSF trustee, you may need to amend your fund trust deed so that it meets the minimum pension standards. For more information on how to do this, talk to your legal adviser.

Record keeping

The fund’s meeting minutes must record that a member has:

• requested to commence a pension
• met a condition of release.

Where one or more of your members is being paid a pension that commenced between 1 July 2007 and 19 September 2007, you also need to keep a record of their election to be paid a pension (under either the current or the former standards).

Electing to treat a pension payment as a lump sum

From 1 July 2017, you can no longer elect to treat the SMSF pension payments (that is, the periodic payments you receive) as lump sums for tax purposes. This election has been removed for everyone who is receiving a super income stream, including a disability income stream or transition-to-retirement income streams (TRIS).

This change means that, if you are receiving a super income stream, and have previously made this election, you no longer have access to the super lump sum low-rate cap for payments from your income stream. As you can no longer have tax free payments up to the low-rate cap, the amount of tax you have to pay on your super income stream may increase.

Commutations

Commutation generally refers to the process of converting a SMSF pension or annuity into a lump sum payment. This payment can be paid to the beneficiary, rolled over to another product within the same super fund, or rolled over to another super fund.

Each commutation is required to be reported to us as a transfer balance cap event on a transfer balance account report (TBAR). Find out more about event-based reporting for SMSFs.

Making a large pension drawdown (rather than partially commuting) does not reduce your transfer balance and would not bring you under your personal transfer balance cap. To reduce your transfer balance, you must commute an amount of your super income stream.

From 1 July 2017, a number of new super rules need to be considered when actioning a request to commute a pension:

• partial commutations no longer count towards the annual minimum pension payment amount
• where the commutation is for the full amount of the pension, trustees must ensure the minimum pension amount has been paid before actioning the commutation.
• where the commutation is only partial, trustees must ensure the minimum amount is paid before commutation, or that sufficient assets remain to meet the minimum pension payment standards for that year, based on the original value of the income stream at the start of the year.

The requirement to make a minimum payment prior to commutation does not apply where:

• the commutation arises on the death of a member, or
• the sole purpose of the commutation is to      
  • pay a super contributions surcharge liability
  • give effect to a payment split under the family law provisions
  • give effect to a client’s right to return a financial product under the corporation's law provisions.
   

Full commutation

If a pension that commenced on or after 20 September 2007 is to be commuted in full, the SMSF must ensure at least a minimum amount is paid from the pension beforehand. This is because the pension ceases at the time the decision is documented to fully commute.

The minimum payment must occur in the same financial year as the commutation.

The amount paid must be at least the pro rata of the minimum annual payment amount.

For pensions commencing in the same financial year they are commuted, the pro-rata minimum annual payment amount is calculated using the number of days from the commencement day of the pension, to the day it is commuted.

Pro rata minimum payment amount = minimum annual payment amount × days from the commencement day to the day pension commuted ÷ 365 (or 366 in a leap year).

Partial commutation

A partial commutation of an SMSF account-based pension does not count towards the minimum pension payment.

Where the super income stream is partially commuted, the value of the super interest supporting the super income stream is reduced.

It is important that trustees prepare and keep records of all decisions made, including those in relation to member payments. These decisions must be documented before the payment is actually made. This is particularly important in relation to the type of payment being made (i.e. commutation or a pension payment).

Each commutation will need to be reported to us as a transfer balance cap event on a TBAR and for some trustees this may mean more events to report 28 days after the end of the quarter in which they happened.

At the time the partial commutation is made, the trustee will need to ensure that they have already satisfied the minimum pension requirements, or that sufficient assets remain to meet the minimum pension payment standards for that year, based on the original value of that income stream.

Payments can't be added to pension after commencement

Once a pension has begun to be paid to the member, the SMSF cannot accept or add further amounts to the capital from which the pension is being paid. This means the member’s pension account cannot be increased by contributions or rollover amounts.

Transfer of pension

If a member dies, the SMSF pension can only be transferred or paid to a person who is a dependant of the member, which includes:

• a surviving spouse or de facto spouse
• a child of the deceased who is under 18 years old
• a child of the deceased, aged between 18 and 25 years old, who was financially dependent on the deceased
• a child of the deceased, aged 18 years old or over, who has a permanent disability
• any person who relied on the deceased for financial maintenance at the time of their death
• any person who lived with the deceased in a close personal relationship where one or both of them provided financial and domestic support and personal care.

Capital value of pension can't be used as security for borrowings

When applying for loans, members cannot use the capital value of the pension or the income from it as security for borrowings.

Rules for pensions commenced before 1 July 2007

Super pensions which commenced before 1 July 2007, and complied with the pension rules at that time, must continue to be paid under the former rules unless it is an allocated pension. Super pensions include market-linked pensions, lifetime pensions and life expectancy pensions. These also include pensions commenced under the transition-to-retirement measure.

Allocated pensions

Allocated pensions which commenced before 1 July 2007 can operate under the new minimum pension standards from 1 July 2007 without the need to commute and restart a new pension. This may save the cost of moving to a new pension.

Complying pensions

Generally, complying super pensions (market-linked, lifetime and life expectancy pensions) which commenced before 1 July 2007 are not able to be commuted in order to start another pension to adopt the new pension rules.

An exception applies for existing complying pensions which were commuted on or after 20 September 2007 in order to purchase a market-linked pension. In these circumstances, the new minimum pension standards will apply to the new market-linked pension, in addition to the rules that normally apply to market-linked pensions.

Changes to asset tests for market-linked pensions

As of 20 September 2007, newly purchased market-linked income streams (or term-allocated pensions) no longer had a 50% pension balance exemption from the Centrelink assets test.

Trustees need to have commenced the market-linked pension before the 20 September 2007 deadline if they wanted to receive the 50% asset exemption.

Transition to retirement

Transition-to-retirement income streams (TRIS) commencing on or after 1 July 2007 must satisfy the minimum pension standards.

In addition, pension payments must be restricted to a maximum of 10% of the pension account balance:

• as it stands at 1 July of each financial year
• at the commencement day of the pension.

Effective from 1 July 2017, the government removed the tax-exempt status of earnings from assets that support a TRIS that is not in the retirement phase. Earnings from assets supporting a non-retirement phase TRIS will be taxed at 15% regardless of the date the TRIS commenced.

Read about SMSF – transition-to-retirement income streams.

Explains how the pension standards apply to self-managed super funds (SMSFs) and the impact on new and existing pensions.