Pension commencements and exempt income | Accurium

Pension commencements and exempt income

Minimum pension standards

Any new income stream commenced in a self-managed superannuation fund (SMSF) after 19 September 2007 will be an account-based type pension. These pensions must meet the minimum pension standards and are required to pay a specified minimum amount at least once a year. The minimum payment required depends on the pensioner’s age at 1 July (or commencement) and is a percentage of the account balance, as displayed below.


Percentage of account balance factor 2013 - 14 onwards

Reduced rates by 50% for the 2019-2020 and 2020-21 income years

Under 65           4.0%  2%
65-74 5.0%  2.5%
75-79 6.0%  3.0%
80-84 7.0%  3.5%
85-89 9.0%
90-94 11.0%  5.5%
95 or more 14.0%  7.0%

The details of these minimum pension standards can be found at the ATO webpage ‘Pension standards for self-managed super funds’[1].

If an SMSF is paying an income stream commenced prior to 20 September 2007 the income stream may be eligible to make payments under these pension standards:

  • Allocated pensions that commenced prior to 1 July 2007 can choose to make payments under the minimum pension standards any time after 1 July 2007 so long as this is permitted by the rules of the Fund.
  • Pensions which commenced between 1 July 2007 and 19 September 2007 can elect to pay the pension under the previous or new pension standards, provided it is permitted by the rules of the Fund.

When electing to commence a pension it is important to ensure that the assets being used to commence the pension are at their current market value.  The value of the assets at commencement will be used to determine the minimum annual pension payment requirement for the income year.

A pension’s minimum pension payment is calculated as follows:

  • For pensions in existence at 1 July, or commencing on 1 July, the minimum pension payment factors (above) are used to calculate the minimum annual pension payment by multiplying the factor by the balance of the income stream at 1 July.
  • For pensions which commence during the income year the minimum annual pension payment for that first year is calculated as the minimum annual amount (using the minimum pension payment percentages) multiplied by the number of days remaining in the income year divided by the total number of days in the income year.
  • The minimum payment amount is rounded to the nearest ten dollars.
  • Where an account-based pension is commenced on or after 1 June in an income year, no minimum pension payment is required to be made for that income year.

Example: Jane Smith commenced a pension on 1 January 2020 and was aged 63.  Her pension was commenced with her entire accumulation balance of $400,000.  Her minimum pension payment factor is 2% not the standard 4% due to the halving of minimum pension requirements in 2019-20.  Her pro-rata minimum pension payment for the 2019-20 income year is therefore $3,980:

$400,000 * 0.02 * 182 / 366 = 3,978 rounded to nearest $10 = $3,980

Transition to retirement phase income streams

From 1 July 2017 a pension will either be in retirement phase or non-retirement phase. A retirement phase income stream is a pension interest which has met a condition of release with a nil cashing restriction. Account-based pensions are retirement phase income streams. A transition to retirement income stream (TRIS) will be a non-retirement phase income stream where the member has not yet met a nil-cashing restriction condition of release (and reported that to the SMSF trustee if under age 65). These pensions must still meet the minimum pension standards. Once a condition of release is reported or the member attains age 65 the TRIS will become a retirement phase income stream.

There are no maximum drawdown limits under the minimum pension standards for retirement phase income streams, if a minimum payment is cashed each year the standards will be met. The exception is a non-retirement phase TRIS from 2017-18 income year onward (or a TRIS in 2016-17 and prior income years), which will have a maximum draw down of 10% of the pension balance at 1 July of each income year, or the commencement day of the pension.

Trustees should review their trust deed and pension documentation to see if the fund imposes additional payment restrictions. For example, a fund which held a TRIS prior to 1 July 2017 may have a clause in the pension documents that explicitly states payments shall not exceed 10% of the 1 July balance each year, if this is the case even though a retirement phase TRIS has no payment limits under legislation the fund’s documentation means the trustees are restricted to a 10% payment on that income stream.

Retirement phase income streams and exempt current pension income

Earnings on assets supporting a retirement phase income stream can be claimed as exempt current pension income (ECPI) in the annual return, reducing the taxable income of the fund. Earnings on assets supporting a non-retirement phase income stream will not contribute to the ECPI claimed by the fund. A minimum annual pension payment must be paid for each retirement phase income stream prior to the end of the income year for the SMSF to be eligible to claim ECPI.

In order to claim ECPI a fund will generally obtain an actuarial certificate which will certify the proportion of fund income that can be claimed as exempt from income tax. This percentage applies to fund income including net capital gains but excluding assessable contributions and non-arm’s length income. The proportion certified by the actuary will represent the proportion of fund liabilities on average that were supporting current pension liabilities over the income year, essentially what proportion of the fund assets over the year were supporting retirement phase income streams that had met the pension standards. The more ECPI a fund can claim the less tax the fund will pay.

As the ECPI calculation is based on a weighted average of fund liabilities the size and timing of events and transactions during the income year will impact the exempt income proportion provided by the actuary. In general, to maximise EPCI trustees should look to maximise the fund’s retirement phase balances and minimise the fund’s non-retirement phase balances over an income year.

The actuarial exempt income proportion only applies to fund assets that are unsegregated. That is where assets are pooled to support both retirement phase and non-retirement phase interests. Below we discuss how you can maximise ECPI claimed on unsegregated fund assets.

Impact on ECPI of commencing an income stream and other fund transactions

The date a retirement phase income stream commences can have a significant impact on the exempt income proportion. 

The average retirement phase balance will increase if retirement phase income streams are commenced and will decrease as pension payments, commutations, or lump sum withdrawals are made. The degree to which these transactions will impact on the exempt income proportion will depend on the size and timing of the events.

Similarly, contributions and rollovers, and non-retirement phase TRIS interests have the opposite impact on the exempt income proportion. A higher accumulation and non-retirement phase pension balance on average will reduce the exempt income proportion.

A fund can commence a retirement phase income stream on a date which is before the first pension payment. By commencing a retirement phase pension early in the year and making the pension payments later in the year, all other things equal, a fund can increase the exempt income proportion.

Example: John Smith commenced a pension on 1 July 2018 for $100,000, as he was 67 years old at 1 July he needed to make a minimum pension payment of 5% of the pension starting balance.  John must have made a minimum pension payment of $5,000 in the 2018-19 income year.  Even if John did not make this minimum pension payment until 30 June 2019 the $100,000 he used to commence his pension would be counted towards his average retirement phase balance for the purposes of the exempt income proportion from 1 July.

The earlier a retirement phase income stream is commenced in the income year, all other things equal, the higher the average retirement phase balance of the Fund over the income year, and the higher the exempt income proportion. If pension payments (and any lump sum withdrawals from pension) are made later in an income year from retirement phase income streams, all other things equal, the higher the average retirement phase balance, and the higher the exempt income proportion.  This is particularly relevant for large payments or withdrawals, which will have a more material impact on the exempt income proportion than regular small payments. 

Based on what we have discussed regarding the effect of the timing and size of pension transactions on exempt income, we see that:

  • A relatively large pension payment or withdrawal made early in the income year will decrease the exempt income proportion more than a small pension payment or withdrawal made late in the income year.
  • A large pension payment made late in the year may have a similar impact on the exempt income proportion as a smaller payment made early in the year. This is because the small weighting assigned to the large pension payment due to its timing will partially offset its size.

Where an SMSF receives a rollover or contribution during the income year the size and timing of the contribution, relative to the size of the fund’s retirement phase balances, will determine the impact on ECPI. If the contribution remains in accumulation phase it will reduce the actuarial exempt income proportion. All other things equal, receiving contributions or rollovers later in an income year and making withdrawals from accumulation phase as early in the year as possible will help to maximise ECPI. This is particularly relevant for large one-off transactions which are more likely to have a material impact on the actuarial calculation.

Where large contributions or rollovers are planned, the trustee could also consider moving those contributions immediately to retirement phase as a new income stream, if this plan of action is taken then receiving the contributions and commencing the pension as early in the year as possible would help maximise ECPI.


This information is provided by Accurium Pty Limited ABN 13 009 492 219 (Accurium). It is factual information only and is not intended to be financial product advice, legal advice or tax advice, and should not be relied upon as such. The information is general in nature and may omit detail that could be significant to your particular circumstances. The information is provided in good faith and derived from sources believed to be accurate and current at the date of publication. While all care has been taken to ensure the information is correct at the time of publishing, superannuation and tax legislation can change from time to time and Accurium is not liable for any loss arising from reliance on this information, including reliance on information that is no longer current. We recommend that you seek appropriate professional advice before making any financial decisions.