Pensions

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 is 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.

Members under the age of 60

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.

Members over the age of 60

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:

1. Consult the Deed
  • Make sure your Fund’s Trust Deed allows a pension to be paid
2. Review Investment Strategy
  • Ensure your Fund’s Investment Strategy reflects the Member’s retirement needs and adjust the strategy if necessary
3. Ensure Pension Fund Income is tax exempt
4. Register for “Pay As You Go” (PAYG) withholding tax

This is required if:

  • You are under age 60, and/or
  • The payments have a taxable component
5. Complete a Pension Commencement Minutes and start the Pension
  • 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

For more info on how to commence pension and make minimum benefit payments to the Members in the SMSF, please watch the ATO video below.

SMSF – Retirement

FAQs (click on the question to reveal the answer)

Q: Do I need to close down the SMSF and start a new one for my pension?

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.

Q: What do I need to do to commence either a transition to retirement pension or an account-based pension?

A: You should ensure that the conversion from accumulation to pension is carried out efficiently and with the appropriate documentation.

Q: Can a transition to retirement pension be cashed as a lump sum?

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%.

Q: Can I commence a pension and still contribute to the SMSF?

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.

Q: When does an SMSF require an actuarial certificate?

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.

Q: Where can I find examples of Pension payments?

A: To see examples of pensions, follow this link to the ATO website.

Q: Is it compulsory to do a PAYG form for a Member who is under 60

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.

Q: Do I need to pay the minimum pension payment for the 2014/2015 year if the pension started on 5 June 2015 (towards the end of the financial year)?

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.

  • mark hobson

    Hi SW

    Reading the article I need some extra information I guess. On getting the house investment
    out into our personal hands as a lump sum deduction during pension phase.

    Would reaching retirement age satisfy condition of release of investment property to ourselves (like a lump sum release)?

    Would there be a CGT implication of tacking the house investment it at this time (retirement) as a lump sum?

    Could it be divested into our private name through TTR phase. This seems to not possible since it would reach the threshold required.

    Scenario is we buy $500,000 house now in SMSF and move it
    out latter when partner and I reach full retirement age (pension phase).

    thanks Mark

  • superannuationwarehouse

    Mark,

    There are strict rules on property in super. With a residential property, the SMSF cannot purchase from a related party (i.e. you) but the SMSF can sell it to you.

    It’s a popular strategy for the Fund to purchase a property and you can then use it in a personal capacity when reaching a condition of release, e.g. pension age.

    To be able to withdraw benefits from an SMSF, a Member must meet the condition of release. Please see a list of conditions of release here:
    http://www.smsfwarehouse.com.au/pensions-in-smsf/conditions-of-release/

    If you are in pension phase and over 60, you can withdrawal all the funds in your SMSF. It can be a lump sum or an income stream pension. You do not need to pay tax on the pension withdrawal. There also won’t be any CGT implication as you are in pension phase and all the income the SMSF generates is tax free. This includes the property realised gain when it’s sold from the SMSF to you in a personal capacity. However, if you are under 60, you
    will need to include the taxable portion of the pension withdrawal into your personal annual income and pay tax on your personal marginal rate. For more info on the Lump sum withdrawal, please see:
    http://www.smsfwarehouse.com.au/pensions-in-smsf/lump-sum/

    If you are in transition to retirement pension, there is a 10% maximum pension
    withdrawal restriction.

    Trust this answers you question.

  • Udai

    Hein,
    I commenced a full pension and withdrew a lump sum amount. Does this lump sum amount count towards the minimum annual pension payment, or do I need to withdraw the minimum amount also ?
    Thanks
    Udai

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Superannuation Warehouse is an accounting firm and do not provide financial advice. All information provided has been prepared without taking into account any of the Trustees’ objectives, financial situation or needs. Because of that, Trustees are advised to consider their own circumstances before engaging our services.

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