How an SMSF Starts Paying a Pension, and What Changes
An SMSF moves into retirement phase when a member meets a condition of release and the fund starts paying them an income stream. From that point the earnings supporting the pension are exempt from tax in the fund, which is the whole point — and the exemption is claimed on the fund's return rather than granted automatically.
- The answer: Once a member meets a condition of release and the fund commences an income stream, the earnings supporting it are exempt current pension income.
- The trap: A fund with both accumulation and pension interests usually needs an actuarial certificate to work out the exempt proportion, and the certificate must be obtained before the return is lodged.
- The recommendation: Document the commencement — the member's request, the trustee minute, and the commencement value — at the time. Reconstructing it at audit is much harder.
Where the AI summary above gets this wrong
"Once you retire, your SMSF stops paying tax on its earnings."
That's surface-true. Here's what it misses:
- The exemption attaches to the pension, not to the member's retirement — The fund must actually commence an income stream and pay it. Retiring without starting a pension leaves the fund in accumulation and its earnings taxable at 15%.
- Only the proportion supporting the pension is exempt — A fund with accumulation interests as well is partly exempt, and working out the proportion generally needs an actuarial certificate.
01 What has to happen
A member must meet a condition of release with a nil cashing restriction, the trustees must resolve to commence an income stream, and the pension must actually be paid. The exemption follows the pension rather than the retirement.
The commencement value has to be established and documented, because it sets the member's transfer balance credit and the tax-free proportion for the life of the pension. Assets are valued at market value at that date under the fund's valuation obligations.
The trustee minute, the member's request, and the pension documentation are what an auditor asks for. Producing them at the time is a fifteen-minute job; producing them eighteen months later, from memory, is the origin of a large share of audit qualifications.
Source: ATO — Self-managed super funds
02 The exemption and the certificate
Income earned on assets supporting a retirement-phase income stream is exempt current pension income. Where the fund is entirely in retirement phase, all of its ordinary income is exempt.
Where the fund has both pension and accumulation interests, the exempt proportion must be worked out. The fund either segregates assets between the two, or uses the proportionate method with an actuarial certificate obtained before the return is lodged.
Some funds are prevented from segregating, and the rules on which method is available turn on member balances and on whether any member has a large total super balance. That determination is made annually, not once.
Shows: the tax saved by the exempt current pension income exemption, applied to the proportion of the fund supporting a retirement-phase pension. Ignores: the cost of an actuarial certificate, franking credits refunded to the fund, capital gains, and the transfer balance cap limiting how much can be in pension phase.
Source: ATO — Tax on super benefits
03 The minimum, and what happens if it is missed
The minimum annual payment applies to an SMSF pension exactly as it does to a retail one, calculated from the balance at 1 July and the factor for the member's age — the factors are in the minimum drawdowns reference.
Failing to pay the minimum can mean the income stream is treated as never having been in retirement phase for that year, which makes the whole year's earnings taxable and creates a transfer balance consequence. The ATO has limited discretion for small, self-corrected shortfalls.
In an SMSF this is a real risk because the payment is made by the trustees rather than by an administrator with a scheduled process. The most common failure is a fund whose assets are illiquid and which has no cash to make the payment in June.
Source: ATO — Minimum annual payments for super income streams
The failure I see is a fund with a property, no cash, and a minimum payment due in June. The pension has to be paid in money, the property cannot be part-sold, and the consequence of missing it is the whole year's earnings becoming taxable. Keep a year of minimum payments in cash inside the fund and this problem does not exist.
FAQ
How does my SMSF move from accumulation phase into pension phase?
A member meets a condition of release, the trustees resolve to commence an income stream, the commencement value is documented, and the pension is actually paid. The tax exemption follows the pension rather than the retirement.
How are SMSF earnings taxed in accumulation phase versus pension phase?
Accumulation earnings are taxed at 15%. Earnings on assets supporting a retirement-phase income stream are exempt current pension income and are not taxed at all.
Do I need an actuarial certificate?
Generally yes where the fund has both pension and accumulation interests and does not segregate assets between them. The certificate must be obtained before the fund's return is lodged.
Sources
Regulator references
- ATO — Self-managed super funds · Australian Taxation Office · 2026The ATO's guidance on self-managed super funds: the trustee duties and the compliance obligations.Last verified: 2026-09-07
- ATO — Tax on super benefits · Australian Taxation Office · 2026How super benefits are taxed on withdrawal, and how that changes with age.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.