Guide to Super Pensions

Last update - 18 July 2024 By Charity Bru

When a member of an SMSF meets specific conditions of release, they are eligible to start a pension using a portion or the entirety of their superannuation balance. This pension provides an income stream for the member, with a required minimum payment each financial year depending on balance and age.

Before Beginning

Before beginning any income stream, it’s essential to review the fund’s trust deed to confirm that it allows the requested type of pension. Older deeds may not accommodate legislative changes and might restrict certain income streams now permitted by law. If needed, trustees can amend the trust deed to permit all allowable pension types.

Reporting requirements must also be met with the ATO or an Accountant. They will need to lodge the TBAR amount prior to 28 days following the end of the quarter.

 

Transfer Balance Account Cap (TBC)

The transfer balance account is a record of the net amounts an individual has transferred into the retirement phase to commence income streams (pensions), which are subject to the transfer balance cap.

The transfer balance cap (TBC) is the maximum amount of superannuation that can be transferred into the retirement phase to receive tax-free earnings on the invested funds. As of 1 July 2021, the general transfer balance cap is $1.9 million.

If an individual has previously used part of their transfer balance cap, their available cap for future transfers into the retirement phase is reduced. The best way to know your personal TBC is to log onto your myGov account.

 

What is a Condition of Release?

Superannuation access is contingent upon meeting a condition of release, with specific cashing restrictions potentially applying. These conditions often relate to significant life events. Once a member meets a condition of release, they can establish a pension and withdraw funds. These conditions include:

  • Attaining preservation age (Transition to retirement)
  • Retirement (after attaining preservation age)
  • Ceasing gainful employment after age 60
  • Reaching age 65
  • Permanent incapacity
  • Death (certain beneficiaries entitled to receive a pension upon the member’s death)

If a member meets a condition of release but opts not to start a pension, they can keep their superannuation in the accumulation phase. However, to maintain concessional tax treatment, the trustees must ensure the fund meets the sole purpose test at all times.

Guide to Pensions in SMSFs

Conditions of Release and Cashing Restrictions

Cashing restrictions refer to the rules and regulations governing when and how individuals can access their superannuation benefits and are usually based on the conditions of release. These restrictions are designed to ensure that superannuation funds are preserved until retirement or until certain conditions of release are met. Here are some key points regarding cashing restrictions:

  • Retirement (preservation age – age 60): Members who were gainfully employed (over ten hours per week) have stopped working and do not plan to return to work.
  • Retirement (age 60 or older): Members have ceased working under an existing employment arrangement (over ten hours per week).
  • Attaining age 65: Members aged 65 or older can access superannuation benefits without restriction, regardless of work status.
  • Permanent incapacity: Members have stopped working and are unlikely to return due to ill health.
  • Death: Superannuation benefits can be released upon a member’s death.

 

Preservation Age

The preservation age refers to the minimum age at which you can access your superannuation benefits, provided you meet a condition of release. The preservation age is 60 years old for everyone after 1964 and is determined by the member’s date of birth.

 

Types of Pensions

Various pensions can be paid from an SMSF, each with different conditions. Accurate record-keeping is essential for establishing each pension. The most common pensions are:

1.   Account Based Pension (ABP)

ABPs are favoured by SMSF members due to their simplicity in calculation and understanding. A minimum withdrawal amount is required based on the member’s age and account balance at commencement, and then on 1 July each year. There are no restrictions on the maximum amount that can be withdrawn or the timing of payments, provided the minimum amount is drawn annually. ABPs benefit from tax exemptions, subject to the Transfer Balance Cap (TBC), which limits the amount of superannuation eligible for tax-free earnings in the retirement phase.

2.   Transition to Retirement Income Streams (TRIS)

A TRIS can commence when a member reaches their preservation age.

Key Features:

  • Purpose: Designed for individuals who have reached their preservation age but are still working, allowing them to access part of their superannuation benefits.
  • Taxation on Earnings: Earnings on investments within the TRIS are still taxed at up to 15%, the same as regular superannuation in the accumulation phase. If the TRIS moves from accumulation to retirement phase, this tax is reduced to 0%
  • Income Payments: Income payments received from the TRIS can help supplement your salary, especially if you reduce your working hours.
  • Contribution Rules: You can continue to contribute to your superannuation while receiving a TRIS in the accumulation phase.
  • Minimum and Maximum Drawdowns: There are rules regarding the minimum and maximum amounts that must be drawn down each financial year. The maximum annual drawdown is capped at 10% of the account balance.

 

Annual Minimum Payment Requirements

The annual minimum payment requirement for both ABPs and TRIS depends on the member’s age at 1 July or the pension’s commencement date.

Age of Member Minimum
Under 65 4.00%
65-74 5.00%
75-79 6.00%
80-84 7.00%
85-89 9.00%
90-94 11.00%
95 and over 14.00%

For newly established pensions, the minimum payment for the first year is calculated proportionately based on the number of days remaining in the financial year. No minimum payment is required for pensions starting on or after 1 June in a financial year.

 

Tax Implications

Commencing a pension through your self-managed super fund (SMSF) has several tax implications that can significantly impact your retirement planning. Here’s an overview of some key tax considerations:

Fund Level

Earnings from assets supporting retirement phase pensions are tax-exempt, while those from accumulation phase accounts are taxed up to 15%, including TRIS in accumulation.

Member Level

Super benefits paid via a pension to members aged 60 or older are generally tax-free and do not need to be included in their personal income tax returns. For members under 60, the taxable and tax-free components at pension establishment determine assessable amounts and necessary tax withholding. A 15% tax offset is available on the taxable component.

 

Key Benefits of Setting Up a Pension

 

  • Tax-Free Earnings: Tax-free nature of the earnings from funds held in the pension phase.
  • Control: Members have flexibility over the amount and timing of pension payments.
  • Refund of Franking Credits: Excess franking credits result in a refund from the ATO upon lodging the annual tax return.

 

Frequently Asked Questions

Can I make future contributions to my superannuation after starting a pension?

In an SMSF a separate member account will be able to be commenced to receive future contributions. Multiple pension accounts can be run from the one SMSF for the one member

Will consolidating all my accounts influence my tax obligations outside of super?

Members can consolidate accounts, but careful consideration is required due to tax implications and personal circumstances. Please consult a financial professional on whether this may affect you.

Can I continue to receive my partner’s pension from their superannuation after they die?

Eligible reversionary beneficiaries can continue receiving the pension upon the member’s death. Death benefit pensions count towards the beneficiary’s PTBC. This restricts how much money people can have in retirement, where the income is tax-free.

 

Rivkin’s Role

Rivkin assists in establishing your pension by:

  1. Reviewing your trust deed.
  2. Preparing compliance documentation.
  3. Refer you to an accountant to assist with reporting of your retirement phase requirements.
  4. Preparing and lodging Transfer Balance Account Reporting requirements.

Important Notice:

Rivkin does not ever provide personal financial advice. Please consider your own circumstances before purchasing any of our products or acting on our general advice, for any Rivkin product or recommendation.

Past performance is not a guarantee of future performance. Investing and trading carry financial risk, when judging performance please consider the different types of investments and levels of risk associated.

 

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