Nonsense-mediated mRNA decay (NMD) is a post-transcriptional mechanism that targets aberrant transcripts and regulates the cellular RNA reservoir. Genetic modulation in vertebrates suggests that NMD is critical for cellular and tissue homeostasis, although the underlying mechanism remains elusive. Here, we generate knockout mice lacking Smg6/Est1, a key nuclease in NMD and a telomerase cofactor. While the complete loss of Smg6 causes mouse lethality at the blastocyst stage, inducible deletion of Smg6 is compatible with embryonic stem cell (ESC) proliferation despite the absence of telomere maintenance and functional NMD. Differentiation of Smg6-deficient ESCs is blocked due to sustained expression of pluripotency genes, normally repressed by NMD, and forced down-regulation of one such target, c-Myc, relieves the differentiation block. Smg6-null embryonic fibroblasts are viable as well, but are refractory to cellular reprograming into induced pluripotent stem cells (iPSCs). Finally, depletion of all major NMD factors compromises ESC differentiation, thus identifying NMD as a licensing factor for the switch of cell identity in the process of stem cell differentiation and somatic cell reprograming.