How to start an SMSF account-based pension in 2026: the 7-step process

Starting an account-based pension is one of the most valuable transitions an SMSF member ever makes — once a pension is running, the investment income supporting it is generally tax-free, instead of taxed at 15% in accumulation phase. But the commencement has to be done in a specific sequence, before 30 June, with the right paperwork. Get any step wrong and the ATO can treat the pension as never having started.

Step 1 — Confirm the member has met a condition of release

An account-based pension requires the member to have met a 'full' condition of release: attaining age 65, retiring after preservation age, permanent incapacity, or terminal medical condition. Reaching preservation age alone is not enough for a full account-based pension — that allows only a transition-to-retirement income stream (TRIS), which is taxed differently.

Step 2 — Check the trust deed

The deed must allow account-based pensions in their current SIS Regulations form. Older deeds (pre-2007) often reference allocated pensions or specific lifetime pension types and need to be updated before commencement. A 30-minute deed review in May is cheaper than discovering in October that the pension wasn't properly authorised.

Step 3 — Decide the starting balance and check the transfer balance cap

The general transfer balance cap is $1.9 million from 1 July 2023 (indexation applies). The amount you transfer into pension phase is a credit to your transfer balance account. If you have never started a pension before, your personal cap is the general cap at first commencement. Anyone close to the cap should model the credit carefully — exceeding the cap triggers an excess transfer balance tax notice and forced commutation.

Step 4 — Pass a trustee resolution and prepare the pension documentation

Document the pension commencement with a trustee minute (or directors' resolution) recording: the member, the commencement date, the starting balance, the proportion of taxable and tax-free components, and any reversionary beneficiary nomination. Issue a Product Disclosure Statement and pension agreement to the member. Without these documents the pension does not legally exist, even if you have paid 'pension payments'.

Step 5 — Nominate a reversionary beneficiary (now, not later)

If you want the pension to automatically continue to your spouse on death, nominate them as the reversionary beneficiary at commencement. Adding a reversionary nomination after the pension has started usually requires commuting and restarting the pension — which is a transfer-balance-cap event, may push you over the cap, and resets the deductible amount calculation. Get this right on day one.

Step 6 — Pay the minimum pension by 30 June

Each financial year, the pension must pay at least the legislated minimum percentage of the 1 July balance (pro-rated in the year of commencement). The 2025–26 rates are 4% under 65, 5% from 65 to 74, 6% from 75 to 79, 7% from 80 to 84, 9% from 85 to 89, 11% from 90 to 94, and 14% from 95 onwards. Missing the minimum in any year means the income on supporting assets is taxable for the entire year.

Step 7 — Lodge a TBAR

Commencing a retirement-phase pension is a transfer balance event. Since 1 July 2023, every SMSF reports TBAR events quarterly — within 28 days of the end of the quarter in which the pension commenced. Late TBAR reporting is the second most common SMSF compliance failure we see.

Segregated vs proportionate method

Most SMSFs use the proportionate (actuarial) method: an actuarial certificate calculates the percentage of investment income that is exempt from tax in proportion to the pension liabilities. Segregation — physically identifying assets as supporting the pension — is rarely worthwhile and is restricted for funds with a member who has a total super balance over $1.6 million holding a retirement-phase income stream anywhere.

After commencement: ongoing obligations

• Pay the minimum each year by 30 June
• Obtain an actuarial certificate annually (proportionate method)
• Report TBAR events quarterly — commutations, full or partial
• Issue the member a PAYG payment summary if any payment is taxable (typically under 60)
• Review the pension on the member's 65th birthday — minimum percentage steps up

Sources: Superannuation Industry (Supervision) Regulations 1994, regulations 1.06(9A) and 1.07; Income Tax Assessment Act 1997, sections 295-385 and 307-80; ATO — Starting a pension from an SMSF (ato.gov.au).