Sinclair Taylor

Given the sole purpose of superannuation is to provide a retirement benefit to members, if you’re over the age of 55 then you may be thinking of accessing your super this year via a lump sum payment (in the form of cash, shares or property) or starting cash-based pension payments from your SMSF. However, before you start paying benefits there are a number of things SMSF Trustees need to consider and do. 

Firstly you need to ensure that you meet a ‘condition of release’, in order for your fund to start paying you superannuation benefits. A ‘condition of release’ can be met through age (55+), death, incapacity, financial hardship, or retirement from the workforce. Importantly, if you are not retired and are under 60 years of age, any super benefits paid to you form part of your taxable income (albeit at a concessional rate), whereas if you are over 60 years of age, super benefits are tax free, even if you’re still working.    

The Trustee(s) then need to decide what type of pension you are going to be paying the member, there are two different types:

  • Account based pension (e.g. retirement pension)
  • Transition to retirement (TTR) pension (e.g. pre-retirement pension)

An account based pension is the most common type of pension. The rules of an account based pension include:

  • You must have reached your preservation age (55+, dependent on your date of birth) and be retired, or meet another condition of release
  • A minimum pension payment must be paid each year.
  • The minimum pension payments change based on your age.
  • You have flexibility as to how often you pay the pension payment, as well as lump sums, subject to meeting the minimum payment each financial year.
  • The pension can be commuted to a lump sum, stopped and started as required.
  • The capital value of the pension cannot be added with further contributions or rollovers), unless the pension is stopped and repurchased.
  • You can nominate a ‘reversionary beneficiary’, such as a spouse, to receive your pension upon your death.

A Transition to retirement (TTR) pension is a more restrictive form of an account based pension that allows you to draw on an income stream from your SMSF if you have reached your preservation age and are still working and therefore don't meet a condition of release to start a regular account based pension.

As the name suggests, this type of pension was introduced to assist members who are in a 'transition phase' to retirement, where you may still be doing some work (say part time or even full time) but need a top up of income drawn from your SMSF assets. However the rules are slightly different:

  • A minimum pension payment must be paid each year. The minimum amounts change based on your age. 
  • No more than 10% of the member’s account balance can be paid each year.
  • You cannot convert your TTR to a lump sum, as such, the fund’s underlying capital cannot be accessed in a lump sum until you retire or satisfy some other condition of release (such as reaching the age of 65 years).
  • Members must have reached their preservation age.
  • Further contributions to super can be made into a separate member accumulation account whilst receiving a TTR pension, however contribution caps still apply. 

With both the account based pension and the TTR pension, the SMSF converts your current accumulation account into a pension account and begins to pay you your pension entitlements as requested. The tax rate applicable to the income earned from these SMSF assets drops to 0 per cent once the pension commences, however the Government recently announced that they intend legislating a tax of 15 per cent on pension income over $100,000, effective 1 July 2014.

Other important questions you need to answer and possibly action before starting any pension payments for members in your SMSF include:

  • Is the member eligible to start a pension?
  • Does the fund’s current Trust Deed allow for the payment of pensions, including a TTR pension?
  • Is the member’s request to start a pension in writing and indicates the intended start date, level of income required and the frequency of pension payments?
  • Is the member under age 60? If yes then the SMSF Trustees must register for PAYG withholding tax.
  • Do you have a current market valuation for the assets that will support the pension payments?
  • Have you calculated the tax free and taxable components of the member’s account balance?
  • Does your investment strategy support the payment of an income stream? Often the fund will need to hold more cash liquidity to support the pension payments required.
  • Has the member been notified in writing by the SMSF Trustees of the minimum payment requirements, any tax free amount and if the member is under age 60 then the withholding tax amount from each pension payment?
  • If you have members who are still in accumulation phase, and other members in pension phase, are you able to segregate the fund’s assets or get an actuary to provide the fund an actuarial certificate each year to identify the tax-exempt pension income?

Payment of a pension from an SMSF requires careful consideration, good advice and good record-keeping to ensure your pension complies with the current superannuation legislation. If you’re unsure how to get started, seek professional assistance.

The ATO sets annual minimum pension payments each financial year. The table below shows the percentage of the account balance that must be paid as a pension for the year ending 30 June 2014.

Pension minimum payment standards
Under 65 - 4 per cent
65-74 - 5 per cent
75-79 - 6 per cent
80-84 - 7 per cent
85-89 - 9 per cent
90-94 - 11 per cent
95 and older - 14 per cent

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.