by Olivia Long

The tax concessions within an SMSF is one of the reasons they are so attractive, even more so when the fund enters pension phase. We will explain the benefits, types of pensions available and who is able to commence a pension.

Pension commencement

Common reasons for members to move into pension phase include:

  • Retirement;
  • Transition to retirement strategies;
  • Incapacity (temporary or permanent); or
  • You need cash to meet your living expenses.

What is a pension?

When a member is contributing to super, this is called ‘Accumulation’ phase. All contributions and earnings in the fund are allocated to the member’s account. This money then remains preserved until the member satisfies a condition of release. Once the member has satisfied a condition of release, they can withdraw monies from their superannuation account, which is referred to as a ‘pension’.

The member can still contribute to the fund if they are eligible to do so, and this is allocated to a separate accumulation account. A member can have both an accumulation and pension account simultaneously within the same SMSF.

Benefits of setting up a pension

Tax free environment

While in accumulation phase, the fund will pay 15% tax on all earnings and capital gains. If a member commences a pension, the income and capital gains associated to the proportion of the fund supporting the pension is tax free.

Refund of franking credits

Franking Credits (also known as imputation credits) associated with franked dividends received by the super fund when in pension phase are fully refundable on lodgement of the annual tax return. As the fund is tax exempt to the extent it is supporting a pension, this can represent a significant tax refund as franking credits represent 30% tax paid on franked dividends.

Tax free income stream

Once the member has turned 60 all pension payments are tax free in their hands and they do not need to be included in their personal income tax return.

Control

As long as the minimum pension withdrawal requirements are met annually, the member can control how much they withdraw and when. Pension withdrawals can be taken annually, on an adhoc basis or as a regular payment.

Condition of release & payment restrictions

A condition of release is a nominated event that the member must satisfy to be able to withdraw benefits from their superannuation. Once the member has satisfied a condition of release their benefits become unrestricted non-preserved and the member has the option of starting a pension.

Prior to the commencement of any pension the fund’s trust deed must be reviewed to ensure that it allows the commencement of the type of pension requested by the member. Some older deeds may not provide for recent changes to legislation and may prohibit types of income streams that are otherwise now permissible by legislation. If necessary, trustees can amend the trust deed of the fund to allow for all permitted pension types to be paid from their super fund.

Types of pensions

There are several types of pensions that may be paid from an SMSF. The most common pensions are:

  • Account Based Pension (ABP);
  • Transition to Retirement Income Stream (TRIS or TTR)


Account based pension

Account Based Pensions (ABP’s) are very popular for SMSF members as they are simple to both calculate and understand. There is a requirement to withdraw a minimum amount which is based on the age of the member and their account balance each year. However, there are no restrictions on the maximum that can be withdrawn or the timing of the payments. Members are able to dictate how much they receive from the fund and how often, providing they draw at least the minimum amount per annum.

Transition to retirement pension

Members that have reached preservation age but are not yet able to satisfy a condition of release, can commence a transition to retirement account based pension, also commonly known as a transition to retirement income stream (TRIS). These pensions are also easy to understand, they are essentially the same as an account based pension. However, the member is limited to withdrawing a maximum of 10% of their pension account balance each year.

Members receiving a TRIS are able to easily convert to an ABP as soon as a condition of release is satisfied, lifting the 10% maximum restriction.

When can I start a pension?



Annual minimum pension requirements: (ABP & TRIS)

The following table outlines the current minimum annual drawdown requirement for both Account Based Pensions & Transition to Retirement Income Streams. The member’s age at 1 July each year (or at pension commencement) will determine the minimum percentage of their member balance to be drawn for that financial year.




The importance of taking the annual minimum pension requirement

Legislation requires a minimum drawdown annually once a pension commences. Failure to do so results in the fund losing its tax exempt status, and therefore tax is payable on income and capital gains of the fund for the entire financial year. It is therefore vital you ensure your minimum pension has been drawn prior to 30 June, each financial year.

Can I continue to make contributions to super?

The simple answer is yes. Contributions made once a pension has commenced are allocated to a new accumulation account for the member. The normal rules and caps on superannuation contributions continue to apply. The proportion of the fund in accumulation phase will attract 15% tax on earnings and net capital gains. When a fund has both accumulation and pension balances, either the fund can be segregated to determine the proportion of income and capital gains to be taxed or if unsegregated, an actuarial certificate is obtained to ascertain the proportion of income and capital gains of the fund that are to be taxed.

How many pensions can I start?

There are no restrictions on the number of pensions a member can start. A member can commence as many pensions as needed to suit their own personal situation.

Can I consolidate my member balance?

A member can at any time nominate to combine their separate balances. This can include consolidating accumulation and pension accounts or consolidating multiple pension accounts.
This process is commonly known as a ‘pension stop and restart’ because it generally involves stopping the existing pension, then immediately transferring balances and commencing a new pension. SMSF members should consider their situation carefully before consolidating accounts as tax free components are recalculated each time a new pension commences. Depending on beneficiary nominations, estate planning and personal circumstances, there may be instances where
consolidation is not appropriate. 

Should I seek advice?

Absolutely. There are a number of strategies surrounding pensions and tax and you should engage an expert to help you maximise them.