You can commence a Pension in your SMSF once you have reached the Preservation Age. The preservation age varies dependent on the Member’s date of birth. A pension commencement allows you to receive periodical payments from your SMSF. A Member can choose from two types of Pensions:
- Account Based Pension: If you are over the age of 65 or have retired and reached Preservation Age you can commence an Account Based Pension. This gives you unlimited access to your Superannuation.
- Transition to Retirement (TTR): A TTR can be commenced if a Member has reached preservation age but not retired.
Minimum and maximum Pensions
There is a minimum Pension amount that you must take annually. The minimum withdrawal is based on your age at the start of the financial year. This is applicable for an Accounts Based Pension and TTR.
There is no upper limit on pension withdrawals from an Account Based Pension. However, in a Transition to Retirement Account, the maximum benefit payment is 10% of the account balance.
Benefit of commencing a Pension
A benefit in commencing a Pension in your SMSF is that no tax is payable on the SMSF earnings (e.g. interest and dividends) and realised capital gains made by your SMSF.
Tax rate in the pension phase
When you convert your superannuation to a pension, there is no tax payable. The earnings from the capital that supports the pension are also tax-free.
Part of your pension payment may be tax-free (the tax-free component generally consists of undeducted or non-concessional personal contributions), and the balance will be taxable. The taxable component of your pension payments is taxed at your marginal rate plus the Medicare levy. You will also be eligible for a 15% tax offset.
Pension payments and lump sum withdrawals are tax-free. The Trustee is not required to report the pension payment to the Australian Taxation Office (i.e. you’re not required to include these payments in your personal income tax return).
Starting an SMSF Pension
To start either an Account Based Pension or Transition to Retirement Pension, simply follow the 5 easy steps below:
- Make sure your Fund’s Trust Deed allows a pension to be paid
- Ensure your Fund’s Investment Strategy reflects the Member’s retirement needs and adjust the strategy if necessary
- Use Segregated Method
- Use Unsegregated Method and obtain an Actuarial Certificate
- Complete a PAYG Payment Summary Superannuation Income Stream Form
- Lodge a PAYG Withholding Payment Annual Summary Statement
This is required if:
- You are under age 60, and/or
- The payments have a taxable component
- Decide the date you want to commence the Pension
- Determine the Market Value of the Assets supporting the Pension Account
- Determine the tax free and taxable component of the Member’s Account
- Work out Minimum and Maximum Pension Payment for each Member
- Sign the Minutes and send a copy to Superannuation Warehouse
A Transfer Balance Account Report (TBAR) is a notification to the Tax Office of the amount that the Trustee adds to their pension balance. The steps to be mindful of when lodging a TBAR report are as follows:
- Determine the Member’s Total Superannuation Balance
- Decide if there will be an income stream (A TBAR is also required for a lump payments)
- Decide if there will be a lump sum payment
- Lodge your TBAR report within the required time frame, generally lodged at the end of the financial year or 28 days within the end of the quarter if the balance is in excess of $1 million
$1.6 Million Transfer Balance Cap
From 1 July 2017, a $1.6 million cap on the total amount of superannuation that can be used to commence a pension was introduced. New rules limit the amount that Members can transfer into a pension account. If a Member has a pension balance over $1.6 million, any amounts in excess of the cap will for part of the Member’s accumulation balance. For more information on the Superannuation Transfer Balance Cap, please visit our $1.6m Transfer Balance Cap page here.
For more info on how to commence a pension and make minimum benefit payments to the Members in an SMSF, please watch the ATO video below.
SMSF – Retirement
From 1 July 2018 the Tax Office introduced a new reporting regime for Members with pension accounts, this is referred to as TBAR.
Time frames for the lodgement of TBARs are based on your total super balance. Reporting to the Tax Office are as follows:
- If the total Member balance is 1 million over, the event is reported within 28 days after the end of the quarter in which the event occurs.
- If the Member balance is less than 1 million it is reported annually.
See our TBAR page for detailed info on reporting events and times frames.
FAQs (click on the question to reveal the answer)
A: No, you continue in your existing SMSF. Pension commencement must be minuted by the Trustees. The advantage of starting a pension in your existing SMSF is the tax savings you’ll make. Capital gains that you make from shares and other assets in the accumulation phase, and then sell after your pension commences, are tax free.
A: You should ensure that the conversion from accumulation to pension is carried out efficiently and with the appropriate documentation.
A: No – a transition to retirement pension cannot be cashed as a lump sum. A minimum of 4% has to be taken and the maximum that can be withdrawn is 10%.
A: Yes – you can commence a pension (including a transition to retirement pension) and still contribute to the SMSF. In this situation, you will have 2 ‘accounts’ in the SMSF. One is your pension account, which pays you the benefits; the other is your accumulation account, into which you make contributions. The accumulation account can accept all types of contributions, including employer contributions, salary sacrificed contributions and personal contributions. The pension portion of the SMSF is tax free. So, if you earn interest on this portion, the SMSF will not pay tax on it.
A: An SMSF paying an account-based pension requires an actuarial certificate if the assets supporting the pension are not segregated from other assets in the SMSF. An actuarial certificate will determine the portion of income that is tax exempt.
Where the assets are segregated, you don’t need an actuarial certificate in order to be eligible for income tax exemption.
A: To see examples of pensions, follow this link to the ATO website.
A: Yes, PAYG withholding is compulsory for pensions paid to someone under 60 as the income is generally not fully tax free and must be included in the Member’s ITR.
A: No, if the commencement day of the pension is on or after 1 June in the financial year, no payment is required to be made in that financial year. For more information on the minimum pension payment, please refer to the Tax Office guideline here.