SMSFS Pension Tips for Beginners
If you hold an account-based pension, then the information below will aid you to learn about the pension standards that apply to SMSFs or self-managed super funds.
Pension commencement day
A pension commencement day is the initial day of your payment period. For instance, if you are paying pension fortnightly, then it will start on the first day of the fourteen-day payment period.
In general, the funds determine the payments' frequency.
Pensions before July 1, 2007
You should continue to pay pensions that started before July 1, 2007, under the preceding pension payment standards, unless it is an allocated pension.
You can decide to begin paying allocated pensions under the minimum standards any moment after July 1, 2007, without needing to commute and begin a new pension, given that your fund's rules sanction this.
Pensions between July 1 and September 19, 2007
Pensions that started between July 1, 2007, and September 19, 2007, could be paid under the past of current pension rules, given that your fund's rules sanction it.
Pensions on or after September 20, 2007
All pensions that start on or after September 20, 2007, should satisfy the minimum pension standards.
Minimum pension standards
Superannuation pensions you pay should meet the following minimum standards:
- the pension should be account-based but in limited cases
- you should pay a minimum amount annually, at least
- you can't boost the capital supporting the pension with rollover amounts or contributions once the pension has commenced
- a pension paid to a deceased member can only be moved to that member's dependant beneficiary
- you can't use the pension's capital value or its income as security for borrowing
- before commuting a pension, you should pay a minimum amount in special cases.
No maximum draw-down limits are allowed for pensions starting on or after September 20, 2007, except transition-to-retirement income streams (TRIS).
"Commutation" is a word which essentially means the process of converting an annuity or pension into a lump sum payment, which can be rolled over to another product or paid to the beneficiary within the same or another super fund.
From July 1, 2017, you'll no longer be able to choose to treat your income stream benefits (or the periodic payments you get) as lump-sum payments for tax purposes. The election has been eliminated for everybody who receives a super income stream, which takes in a disability income stream or a TRIS.
This change can mean that if you're receiving a superannuation income stream, and often would've made this election; you cannot access the superannuation lump sum low rate caps for income stream payments any longer.
Thus, as you won't be able to have your tax-exempt payments (up to the low-rate cap), the tax you need to pay on your income stream could boost.
Minimum pension payments for the 2017-2018 year (and for the 2016-2017 year)
When you commence a super account-based pension, you'd be required to get a minimum amount every fiscal year to be exempted from tax for the fund assets' investment earnings that finance your superannuation pension.
Note that a fiscal year isn't like your calendar year because it runs from July of a year through June 30 of the next year – for instance, July 1, 2017, to June 30, 2018, for 2017-2018 financial year or July 1, 2016 to June 30, 2017, for 2016-2017 financial year.
The least amount for pension payment – payable for a fiscal year – is entirely based on the member's age and his account balance size. The yearly minimum payment is computed on July 1 every year with the percentage associated with the member's age and the balance of his pension.
So if you are 65 - 74 years old, the least pension payment for account-based pensions is 5% of the account balance of your pension as of July 1. For instance, Michelle is 68 years old and contains $500,000 in her super account-based pension account on July 1, 2017.
Her yearly minimum pension payment falls under $25,000 under the pension rules that apply for the 2017-2018 year.
This is the formula:
Account balance x percentage factor = minimum payment.
The reduced minimum yearly pension payments before was intended to help ease the draw down on ravaged retirement savings as well as to reduce provoked asset sales to adhere to the pension payment rules.
Sadly, several retires with low account balances; they needed to withdraw the minimum pension amounts to meet daily living expenses, meaning the pension payment relief before was unhelpful to these group of retirees.
The factors for minimum pension payments apply to annuities and account-based pensions – payable since July 1, 2007; and allocated annuities and pensions.
Firstly, if you hold a market income stream, the yearly minimum pension payment calculation is different. Regarding calculating this, refer to the SIS Regulations, or talk to your financial adviser or accountant.
Secondly, if you hold an older allocated pension – established before July 2007 – and you've decided to continue running under the previous payment rules (with maximum and minimum payment rules), for payment factors.
Minimum yearly pension payments for account-based pensions – old financial years
You can find more information on this on the article – Reference to Self-managed Super Funds
The temporary pension relief
The most considerable factor for retirees was the immense decrease in the account balance value, which compelled several of the retirees to sell their assets during a market depression to meet the minimum requirements for pension payment.
This pension relief was excellent news for retires trying to preserve capital, though the declaration was comfort retirees who have to sell their assets to have a normal income.
Sadly, some retirees were compelled to sell their assets within a depressed market to fund yearly income streams or maintain their current lifestyles, and the previous history of pension relief, a lot of retires had sold assets to live, since the pension relief was declared so late during the affected financial year.
Several retirees went back to work to increase superannuation savings or to compensate pension income.
Relief for self-managed super funds lifetime pensions
Defined benefit pensions like lifetime pensions weren't qualified for temporary relief over the GFC-triggered pension payments, but specific lifetime pensions got a reprieve on paying back the Age Pension entitlements because they fail the solvency test.
Because of the dramatic investment market depressions, several SMSFs paying life pensions encountered solvency problems with pension assets, meaning that these solvency problems may have impacted the exception that these pensions got from Centrelink's assets test.
Some lifetime pensions – called the assets tax-exempt pensions or "complying income streams" – commenced before September 20, 2004, are entirely exempted from the assets test. Life pensions began after September 19, 2004, but before September 20, 2007, are half exempted from the assets test.
One major condition to maintain the asset test is getting an actuarial solvency certificate annually validating that the self-managed super fund has a huge chance of getting the ability to pay back the defined benefits annually for the fund member's expected life.
In general, if a Self Managed Super Fund does not meet the solvency requirements, the incomes stream is not exempt from assets test any longer. Also, the member would then need to repay five fives' worth of Pension Entitlements.
An actuary conducts the solvency test. His or her job is to evaluate whether or not the Self Managed Super Fund has a big chance of having the ability to pay the annual benefit pension payment for the fund member's life expectancy.
With the rules, if your lifelong pension did not qualify the solvency test, you did not need to repay Age Pension entitlement.
But you would've lost your exemptions from the asset test until you transfer your assets to a certain pension product provided by the financial organizations, or unless you converted your Self Managed Super Fund lifetime pension within a market-linked one within your self-managed super fund.
If you have attempted finding a product such as these, then be aware that they are quite costly and expensive. Moreover, loads of individuals weren't too keen on having to end up an SMSF to exploit the relief. So they chose to switch the pension inside the current SMSF.
Managing a pension with a self-managed super fund is a huge development on the first announcement, yet there wasn't an option for holding the asset test exemption back. The term allocated pension or TAP or market-linked pension is an account-based pension bound by special rules based according to towards life expectancy.
A little bit of SMSF pension under may be OK
They particularly when the underpayment is a result of an honest mistake, or as a result of circumstances beyond one's control.
Before January 2013, the definite answer to this question was: for the budget year wherein the rules for minimum pension payment were not satisfied, the superannuation account carrying the pension cash wouldn't be deemed to be in the pension phase.
The concerns of the status change to the super account were that the assets' earnings funding the super account weren't tax-free for that financial year (meaning that 15% tax would bind account's earnings for the year).
The Super Setback
Furthermore, if the member desired to be in the pension phase, then they had to start a new super the next financial year plus a calculation of the taxable and tax-free parts of future retirement benefits paid.
Before January of 2013, another super setback was that whichever expenses made from the Superfund from the beginning of the financial year (when pension phase was considered to be absent) would be regarded as lump sums covered by the tax and super laws, without flexibility.
Since January of 2013, and retrospectively taking effect from July 1, 2007, the ATO (Australian Tax Office) decided to display tolerance and apply the "Commissioner's powers of general administration": in certain cases, where a super fund member is unsuccessful to withdraw the amount of minimum annual pension in a budget year, the pension account won't lose its tax-free status, and it is considered to continue, instead of to stop.
Important: The tax-free super pension income is formally known as "exempt current pension income (ECPI)."
Starting a Pension in Your SMSF
Once you reach your preservation age, you may choose to either commence a Transition to Retirement Income Stream, or if you are retired, you can commence and Account-based Pension. The main difference between the two is that one pays benefits before retirement while the other pays benefits after your retirement.
Transition to Retirement allows a member who has reached their preservation age to access his Superannuation benefits Income Stream even while still working. In Transition to Retirement, you may be able to reduce your working hours without reducing your income.
This can be done by tapping out your part-time income with a regular income stream from your Self-managed Super Fund. Once a member commences a Transition to Retirement, they will have two accounts within the Self-Managed Super Fund – one being the income stream account and second being an accumulation account accepting future super contributions.
An Account Based Pension is a way or receiving your super benefits as an income stream after you've reached your preservation age and have permanently retired. Income within the pension is not taxable regardless of earnings being classed as income or capital gains.
Account Based Pensions are very flexible as they allow the member to choose how much income is received each year and you also have the flexibility to withdraw lump sum amounts in addition to the pension amount.
Regardless of whether you commence a retirement or an account-based pension, you must withdraw a minimum amount annually. The minimum pension amount within your age can be calculated as a percentage of your super balance as displayed.
With an account-based pension, there is no maximum limit on what you can withdraw. Meaning that the member can take the whole balance of the whole fund as and when desired. With a Transition to Retirement, the maximum annual amount you can withdraw is 10% of the member super fund balance.
You cannot withdraw money out of your Self-managed Super Fund until you reached your preservation age.
There are several benefits of commencing a pension within your Self Managed Super Fund. The initial benefit is that you can begin accessing your super funds even if you're still working.
Which means that you have the option to reduce your working hours while maintaining the same income level or to have access to the same funds to help with living expenses as and when they arise.
However, the main benefit is that the Self-managed super fund tax rate effectively reduces to new once you start your pension. This means that all income and realized capital gains will remain in the member's balance after the pension has commenced will be tax-free.
The Pension Phase
Most of us assume that we can only access our superannuation fund when we retire. That's not the case. You can access the portion of your fund when you hit preservation age.
Jean is about to turn 60. And that means she can start accessing her super fund very soon tax-free. So what happens in pension mode? Well, you can no longer throw funds in. However, you need to start taking in a minimum pension of from your super fund.
When Jean's super fund is switched into a pension, that $100,000 she currently has sat on her super, which is earning $2,000 per annum per income – that income is usually taxed at 15% in accumulation money. But in pension, it typically is paying 0% in tax.
If Jean held shares and sold them, and made a profit of $10,000, she would have to pay approximately 10% in capital gains tax on profit in accumulation money. In a pension, she would pay 0%.
Before you start a pension, you need to ensure that you are fully informed of the options available and what is suitable for your particular retirement circumstances. Australian Super Finder can advise you on these matters and make the process of working you're super easier for you.
For a complete guide to Self-managed Super Funds, refer to the article – Australian Super Finder Resources
Disclaimer: All information on this website is of a general nature only. We have not taken into account your financial situation, needs or objectives. You need to make up your own mind and ascertain yourself if it is right for you. We recommend you read the product disclosure statement(s) and the financial services guide before making any financial decision.