Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 227

Moving your SMSF into pension phase

Using your accumulated superannuation benefits to commence a pension is a common way to generate retirement income. If you have an SMSF, there are a few things to consider when starting a pension.

What is an account-based pension?

An account-based pension is like a personal retirement income account operating in a superannuation fund. You receive regular income payments, while at the same time your account may earn investment income. Any investment income earned in the pension account is generally tax-free. Note that before you can start to receive an account-based pension with your super benefits, you must have met a condition of release.

The most common conditions of release are:

  • retirement after reaching preservation age
  • attaining age 65, or
  • permanent incapacity.

Your preservation age depends on when you were born, starting at age 55 years if you were born before 1 July 1960, and increasing by a year each year until it reaches 60 years-of-age for those born after 30 June 1964.

Your SMSF’s trust deed must allow the payment of an account-based pension. It is a good time for a general review of your trust deed. An update will generally require the services of a legal professional.

Know your limits

From 1 July 2017, a limit (called the transfer balance cap) applies to the amount of your accumulated superannuation benefits that you can use to commence a pension. The transfer balance cap is a lifetime limit that is set at $1.6 million in 2017/18.

This limit applies to account-based pensions, as well as other types of superannuation income streams you might have such as lifetime or life expectancy pensions, market-linked pensions and defined benefit pensions. However, if you have a transition to retirement pension, it will not be counted until you meet a full condition of release such as retirement after reaching preservation age, attaining age 65 or permanent incapacity.

When you start an account-based pension, the starting balance will count towards your transfer balance cap. If you make a lump sum withdrawal from your pension account, the amount counted towards your transfer balance cap will be reduced. However, pension payments and investment earnings in the pension account will not change the amount of your pension that is measured against your transfer balance cap.

Before starting a pension, speak with your financial adviser to ensure you do not go over your transfer balance cap, as penalties may apply if the cap is exceeded. If you receive another superannuation pension, the combined value of your pensions will generally count towards your transfer balance cap.

Certain transactions that impact your transfer balance cap, such as when you commence a pension or make a lump sum withdrawal, will be reportable to the Australian Taxation Office. Your SMSF administrator or accountant may be able to assist you with these reporting requirements.

Consider your fund’s investment strategy

The investment strategy that suited you prior to starting a pension might not continue to be appropriate. One of the objectives of an account-based pension may be that it lasts throughout your lifetime, so it’s important to review your investment strategy when setting up your account-based pension.

Your investment strategy should take into consideration that, in moving to an account-based pension you’ll be drawing down on your capital. Studies show that the impact of negative returns can be greater when you’re drawing down on your capital compared to when you’re adding to it.

Make the minimum payments

When running an account-based pension, one of the key requirements is to ensure you draw at least the minimum pension payment amount each financial year. This is an important requirement for maintaining the tax-free status of earnings in your pension account.

The minimum amount you have to draw each year is calculated by multiplying a percentage factor by your account balance. The minimum percentage factor depends on your age when you start the pension and on 1 July for subsequent years.

If you start your account-based pension part way through the year (prior to June), your minimum pension is calculated in proportion to the number of days remaining in the financial year. If you commence your pension in June, no minimum pension payment is required in that financial year.

When starting a pension, it’s important to get a current market valuation of the assets for each member’s pension account. The value of your account is required to calculate your minimum payment level, for transfer balance cap purposes and to complete your fund’s tax returns. If you don’t meet the minimum payment requirements then the assessable investment earnings for the income year may be taxed at 15%, rather than being tax-free. It’s not enough for your SMSF to simply ‘account’ for the minimum payment through a journal entry. Funds must actually be paid from your pension account and leave your SMSF.

Keep your records safe

SMSF trustees are required by law to keep records of transactions of the fund, including those relating to pension payments. These records will also assist your accountant in substantiating your fund’s tax position. Generally, records relating to pension payments must be kept for a minimum of five years, but note that some records (e.g. minutes of trustee meetings) must be kept for 10 years.

Estate planning

When you commence a pension, the rules of your SMSF may allow you to nominate a dependant (usually your spouse) to continue to receive the pension after your death, often referred to as a reversionary pension.

Alternatively, you may be able to nominate one or more of your dependants, or your legal personal representative (typically referred to as your estate) to receive your remaining account balance after your death. Death benefits can be paid as a lump sum, a pension or a combination of lump sum and pension. However, only certain dependants (such as your spouse or minor children) are eligible to receive your benefits as a pension. If your superannuation benefits are paid to your estate, the proceeds will be distributed according to the terms of your will.

Your account-based pension can be an important part of your estate planning and it may be appropriate to review your estate planning arrangements when you commence your pension.

 

Matthew King is a Private Wealth Adviser at Macquarie Bank, a sponsor of Cuffelinks. This information is general in nature and does not take into account your objectives, financial situation or needs.


 

Leave a Comment:

     

RELATED ARTICLES

When the $1.6m cap is no longer relevant

Misplaced focus on high yielding stocks in retirement

Can your SMSF buy a retirement home for you now?

banner

Most viewed in recent weeks

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Latest Updates

Retirement

Stop treating the family home as a retirement sacred cow

The way home ownership relates to retirement income is rated a 'D', as in Distortion, Decumulation and Denial. For many, their home is their largest asset but it's least likely to be used for retirement income.

Property

Hey boomer, first home buyers and all the fuss

What is APRA worried about? Most mortgagees can easily absorb increases in interest rates without posing a systemic threat to the banking system. Housing lending is a relatively risk-free activity for banks.

Property

Residential Property Survey Q3 2021

Housing market sentiment has eased from record highs and confidence has ticked down as house price rises slow. Construction costs overtook lack of development sites as the biggest impediment for new housing.

Investment strategies

Personal finance is 80% personal and 20% finance

Understanding your own biases and behaviours is even more important than learning about markets. Overcome four major cognitive biases that may be sabotaging your investing and recognise them in others.

Where do stockmarket returns come from over time?

Cash flow statements differ from income statements and balance sheets, and every company must balance payments to investors versus investing into the business. Cash flows drive the value of the business.

Fixed interest

How to invest in the ‘reopening of Australia’ in bonds

As Sydney and Melbourne emerge from lockdown, there are some reopening trades in the Australian credit market which 'sophisticated' investors should consider as part of their fixed income portfolios.

Shares

10 trends reshaping the future of emerging markets

Demand for air travel, China’s growing middle-class population, Brazil’s digital payments take-up, Indian IPOs, and increased urbanisation are just some of the trends being seen in emerging economies.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.