There are two types of SMSF pensions:
1. Account-based pension
2. Transition to retirement pension
When an SMSF Member reaches preservation age (currently between age of 55 to 60, depending on the year he/she was born), the Member may commence a transition to retirement income stream. You can start a transition to retirement income stream in your SMSF whilst still being employed.
When you are retired, you can commence an account-based pension.
A transition to retirementincome stream pays benefits before retirement. An account-based pensionpays benefits after retirement.
Transition to retirement
A transition to retirement pension allows you to receive your SMSF benefits as an income stream whilst you are still working provided that you reach preservation age.
A pension account is created from the monies accumulated in the SMSF. Investment earnings are added to the account and pension payments are deducted from the account until the account balance is fully paid out (fully commuted).
Account-based pension (post-retirement)
An account based pension is a way of receiving your superannuation benefits as an income stream, instead of a lump sum, after you have reached your preservation age and permanently retired or have satisfied another condition of release.
The pension account is converted from the monies accumulated in the SMSF. Investment earnings are added to the account and pension payments are deducted from the account until the account balance is fully paid out.
Taxation of benefits in pension phase
When you convert your superannuation to a pension, there is no tax payable. From 1 July 2017, the earnings from the capital that support the Transition to retirement pension are taxed at 15% while those generated from account based pension are tax-free.
Member over the age of 60
To receive an Account Based Pension, a Member must be:
1. 60 + and retired or
2. 65+ (can still work)
Pension payments and any lump sum withdrawal are tax-free. The Trustee is not required to report the pension payment to the Australian Taxation Office (you are not required to include these payments in your income tax return).
Member under the age of 60
Part of your pension payment may be tax free (tax-free component, generally consisting of after-tax money or non-concessional personal contributions), and the balance will be taxable. The taxable component of your pension payments are taxed at your marginal rate plus Medicare levy. You will also be eligible for a 15% tax offset.
Minutes for an SMSF Pensions Commencement
To start a pension, the Trustees have to minute this decision. Download this sample minutes to start your pension (just add your own SMSF details in).
FAQs on SMSF Pensions
Do I need to close down the SMSF and start a new one for pension?
No, you can continue with your existing SMSF. Trustees need to minute the pension commencement. The advantage of starting a pension in your existing SMSF is tax-saving. After you commence pension, capital gains from selling assets bought when the Fund was in accumulation phase is tax-free.
What do I need to do to commence either a transition to retirement pension or an account based pension?
You should ensure that the conversion from accumulation to pension is effective and appropriately documented by Minutes.
Can a transition to retirement pension be cashed out as a lump sum?
No – a transition to retirement pension cannot be cashed as a lump sum. There is a minimum that has to be taken of 4% and the maximum that can be withdrawn is 10%. However, the withdrawal rate can be compounded. For example, a Trustee has $100,000 in his Super Fund. He withdraws a transition to retirement pension of 10%, leaving $90,000 left in the Super Fund. In the same year, he can take out another 10% of the remaining amount of $90,000.
Can I commence a pension and still contribute to the SMSF?
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 being the pension account which will pay you the benefits and the other is an accumulation account that you can make contributions to. The accumulation account accepts all types of contributions, including employer contributions, salary sacrificed contributions and personal contributions.
When does an SMSF require an actuarial certificate?
An SMSF paying an account-based pension requires an actuarial certificate if the assets supporting the pension is 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, no actuarial certificate is required for eligibility for income tax exemption. Superannuation Warehouse, thereby, recommends going for this approach to save fees in the SMSF. An actuarial certificate cost around $300.
Can I have some examples on Pension payments?
To see some pension examples, follow this link to the ATO website.
Can I rollover a pension account into an SMSF?
Yes – you can rollover your pension balances into your SMSF. The best way to do the rollover is to commute your existing balance, along with the Pension Minutes showing your decision.
