“These changes impact how pensions are treated for tax purposes if a minimum pension is missed and could have serious implications for retirement planning strategies.”

Previously, rules provided some flexibility with minimal adverse consequences.

“However, the ATO has now taken a stricter stance, which may have major implications not only for the current and the previous year’s tax position but also on strategies designed to quarantine pensions with high tax-free components from ones with mixed components,” Shorte said.

There are a number of key implications to the changes, with one of the most crucial being what happens when a pension fails to meet the minimum pension.

“Under the new rules, if a pension fails to pay the minimum pension, it is treated as ceasing at the beginning of the financial year rather than the end,” Shorte said.

“This means, firstly, the pension account converts to an accumulation account immediately at 1 July of the relevant tax year. Additionally, if an existing accumulation balance exists, the two amounts will merge for tax purposes, potentially disrupting carefully planned tax strategies. These strategies often revolve around blended families.”

The changes will also create complications for the transfer balance cap, Shorte said, warning that if a pension fails at the start of the year, the transfer balance cap credit must be applied immediately.

“The pension can only restart once the member rectifies any errors, such as failing to meet minimum pension drawdown requirements, which may take 13 to 22 months from the date the pension has to be commuted under the enforced rules.”

“This is because for many people the first time they realise that they have not paid the full minimum pension payment is when their accountant or administrator drafts the financial documents, which is often nine months after the end of the financial year.”

He added that during this gap, market growth could lock a portion of the funds out of pension phase due to the TBC issues, limiting tax efficiency and spoiling estate planning strategies.

Finally, Shorte said there are also market investment considerations to think about.

“If markets rise while a pension is inactive, the increased account balance may exceed the available transfer balance cap.”

“This means that some funds could remain stuck in accumulation phase, missing out on tax-free pension earnings, or members may not be able to restore their pension to its original value, reducing retirement income benefits.”

In light of these changes, Shorte recommended that SMSF trustees, accountants and advisers should review pension compliance to avoid accidental failures.

“Request a Minimum Pensions Report from your accountant/adviser. Do not just rely on the last 30 June financials as you need to ensure you include any new pensions that began in the current financial year.”

“You should also monitor minimum drawdowns before 30 June each year to prevent unintended cessations. Have someone cross-check the payments for you, and be aware that market linked and term-allocated income streams have different minimum drawdowns.

“Finally, plan for tax implications if pensions lapse and merge with accumulation accounts and consider timing and market risks when restarting pensions.”