Minimum pension payments explained

When you move from saving in your SMSF to drawing a pension from it, a new rule kicks in: each year you must take out at least a minimum amount. Miss it, even by a little, and the consequences can be serious. This article explains the minimum pension rules in plain terms.

Why there is a minimum

Super in pension phase gets a valuable tax break: the investment earnings on the money supporting your pension are generally tax free. In return for that break, the rules require you to actually draw the money down as a pension, rather than leaving it to grow tax free forever. The minimum payment is how the rules make sure the pension is a genuine pension.

How the minimum is worked out

The minimum is a percentage of your pension account balance, and the percentage goes up as you get older. It is based on your balance at the start of the financial year, on 1 July, or on your balance when the pension starts if that is during the year.

The percentages are:

Under 65: four per cent.

65 to 74: five per cent.

75 to 79: six per cent.

80 to 84: seven per cent.

85 to 89: nine per cent.

90 to 94: eleven per cent.

95 and over: fourteen per cent.

So if you are 70 with a pension balance of a certain amount on 1 July, your minimum for the year is five per cent of that balance. You can always take more than the minimum if you want to; the rule only sets a floor.

The first year is pro-rated

If your pension starts partway through the year, the minimum is reduced to match the part of the year the pension runs. And if your pension starts in June, right at the end of the financial year, no minimum is required for that first short period.

Pay it before the year ends

The key practical point is that you must actually receive the minimum amount before 30 June. It is not enough to intend to take it or to record it on paper; the money has to leave the fund and reach you. Many trustees set up a regular payment through the year so the minimum is comfortably met without a last-minute rush.

Why a shortfall is so serious

If you do not take the full minimum, even by a small amount, the pension can be treated as if it stopped at the start of the year. That means the fund can lose the tax-free treatment on the earnings supporting that pension for the whole year, which can be an expensive mistake for the sake of a small shortfall. This is why it is worth checking the figure carefully and paying it well before year end.

A note for transition pensions

If you are drawing a transition to retirement pension, which some people start before fully retiring, there is both a minimum of four per cent and a maximum of ten per cent. So with that type of pension you have to stay within a range, not just above a floor.

The bottom line

Once your fund is paying you a pension, you must draw at least the minimum percentage for your age each year, based on your start-of-year balance, and the money must actually reach you before 30 June. A shortfall, however small, can cost the fund its tax-free pension earnings for the year, so check the amount and pay it in good time.

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This article is general information for trustees and members. It is not financial, legal or tax advice about your particular situation. Consider getting advice from a licensed professional before making decisions about your fund.