In a monthly column to assist trustees, specialist Meg Heffron explores major issues on managing your SMSF.
Superannuation pensions in retirement phase are brilliant for members of any fund, not just SMSFs. They allow super to be converted into an income stream to live on in retirement and the fund itself stops paying income tax on some or all of its investment income (rent, interest, dividends etc).
For some people, the tax break is so large in an SMSF that it pays no tax and in fact receives a full refund of all its franking credits every year.
Same tax rules but not same opportunities
All super funds follow the same tax rules so in many ways, SMSF pensions are just the same as any other superannuation pension. But there are some aspects of running an SMSF that make it the preferred structure from which to pay a superannuation pension.
Here are four ways a pension in an SMSF may work better.
1. Easier to start with no need to move assets
In a public fund, members who start pensions need to set up a new account in that fund and explicitly move some of their existing accumulation super balance into it. That generally means application forms, waiting for requests to be processed, providing information to confirm they are eligible to start and more. Public funds allow members to choose specific investments for their super and the member will also need to choose which ones to move across to the pension account.
In an SMSF there’s no need to do any of these things. Because the members and trustees are all the same people, pensions can be started instantly. Of course, there is documentation to prepare and it’s every bit as important as in a public fund but the documentation can follow after the pension starts. The critical member request and trustee decision to start can be immediate.
And there is no need to move assets or set up new bank accounts. Everything stays exactly the same but the fund’s accountant does some extra work in the background to track the new pension account.
2. Payment timing flexibility
There’s no rule that says people with pensions must take their pension payments as regular monthly or fortnightly amounts. But many public funds require it for practical reasons. When there are thousands of people drawing pensions, it makes sense to impose some rules to simplify the administration involved.
SMSF members are free to do whatever they want, subject to the law, and the law is not prescriptive here. The only requirement is that the member takes enough to meet the minimum payment rules each year. Some people do this by arranging regular bank transfers but others might do something completely different.
For example, some people don’t take any pension payments during the year but then withdraw the whole minimum amount in one go. Others go to the extreme of having their personal credit card or other bills paid by their SMSF each month (each payment is a pension payment). And some even just take payments when they want them. With online banking, it’s as simple as hopping online and transferring money as and when it’s needed.
Essentially, it’s whatever works for the members concerned.
3. Members of a couple act together
It's common for couples who share an SMSF to think about their pension payments together. For example, they might decide to draw $10,000 per month (combined) and arrange a single monthly direct transfer to their personal bank account. Behind the scenes, their accountant will divide each payment up between them (or between their various accounts if they have multiple pensions) but they don’t need to take separate payments.
This is different to pensions in non-SMSFs where each pension account must make its own cash transfer to the relevant member.
In a retail fund where the members choose their own investments, treating each pension account as a self-contained ‘pot’ may mean a sale of an investment in one account (to pay the pension) even though another account has plenty of cash.
A good example is someone who has both a pension and an accumulation account. The accumulation account might be receiving contributions and investment income and so is building up cash. But that cash can’t be used to pay the pension.
An SMSF is quite different. Pensions are paid from the fund’s bank account which is generally shared by all members and all accounts. It’s common to find that the cash flow for pension payments is coming from contributions (even contributions made by other members) and investment income across the whole super fund investment portfolio, not just part of it.
Again, behind the scenes the fund’s accountant makes sure everyone gets their fair share but in a practical sense, it means minimising costs by sharing cash more effectively.
4. Draw additional amounts as needed
The ability to share cash can even have ramifications beyond pension payments. It’s common for members of both SMSFs and retail or industry funds to withdraw more than they have to in some years. Those extra payments don’t have to be treated as pension payments and there are often good tax reasons to treat them differently.
For example, in some cases, it’s better to treat extra amounts as withdrawals from an accumulation account or as different types of payments (called ‘partial commutations’) from pension accounts.
Once again, this is easy to set up in an SMSF. The member can simply provide standing instructions to the trustee that once they’ve taken at least their minimum pension out of the fund, subsequent payments should be treated in a particular way. They don’t need to keep track of exactly when that happens. And they don’t need to take the extra amounts from a separate bank account. In a public fund they would have to do all these things.
First among equals for pensions
In many ways, super in an SMSF and a public fund is the same, but moving into pension phase is one of those times when it’s often easier to have an SMSF.
Meg Heffron is the Managing Director of Heffron SMSF Solutions, a sponsor of Firstlinks. This is general information only and it does not constitute any recommendation or advice. It does not consider any personal circumstances and is based on an understanding of relevant rules and legislation at the time of writing.
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