Moving your Self Managed Super Fund (SMSF) into Pension Phase

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1 Moving your Self Managed Super Fund (SMSF) into Pension Phase Moving accumulated superannuation benefits to pension phase is a common way to fund retirement income. If you have a self managed superannuation fund (SMSF), there are a few things you should think about when starting a pension. What is an account-based pension? An account-based pension is like a personal retirement income account operating in a superannuation fund. You receive regular income payments, while at the same time your account may earn investment income. Any investment income earned in pension phase is generally tax free. Note that before you can start to receive a pension with your super benefits, you must have met a condition of release. The most common conditions of release are: Reaching your preservation age Permanently retiring after reaching preservation age Reaching age 65, or Permanent incapacity Your preservation age depends on when you were born:

2 Before 1 July 1960 (Preservation age is 55 years) 1 July June 1961 (Preservation age is 56 years) 1 July June 1962 (Preservation age is 57 years) 1 July June 1963 (Preservation age is 58 years) 1 July June 1964 (Preservation is 59 years) After 30 June 1964 (Preservation age is 60 years) Check your trust deed Your SMSF s trust deed must allow the payment of an account-based pension. It is a good time for a general review of your trust deed, and an update, if appropriate. This will generally require a legal professional. Consider your fund s investment strategy The investment strategy that suited you in accumulation phase might not be appropriate in pension phase. One of the objectives of an account-based pension may be to have your capital last throughout your lifetime, so setting up your account based pension marks an important time to review your investment strategy. Studies show(1) that in general the impact of negative returns can be greater when drawing down on your capital, compared to when in accumulation phase (where generally you won t be drawing down, and may be adding to your capital), so your investment strategy should take into consideration this additional risk. Your adviser will be able to assist you in determining an appropriate investment strategy for your SMSF.

3 Make the minimum payments When running an account-based pension, one of the key requirements is to ensure you draw at least the minimum payment amount each financial year. This is an important criteria in maintaining the tax-free status of your fund s earnings in pension phase. The minimum amount you have to draw is a percentage of your account balance based on your age, which is calculated as follows: Required minimum payment amount = payment factor x account balance Your minimum percentage depends on your age: Under 65 (4% payment factor) (5% payment factor) (6% payment factor) (7% payment factor) (9% payment factor) (11% payment factor) 95 and over (14% payment factor) To calculate your minimum payment amount follow these simple steps:

4 Step 1: Work out the payment factor that applies to you. This will be based on your age when you started your pension (in the year of commencement) or at 1 July (for subsequent years). Step 2: Work out the value of your pension. When starting a pension, it s important to get a current market valuation of the assets for each member s pension account. If you are planning to start multiple pensions, this will involve a market valuation for each pension account. Your accountant or fund administrator may be able to assist with these valuations. The value of your account is required to calculate your minimum payment level, and to complete your fund s tax returns. Step 3: Calculate the minimum payment amount you need to make by multiplying the result of steps 1 and 2. This amount may be modified in certain circumstances, outlined below. If you start your account based pension part way through the year (but not in June): The payment factor will be applied to the account balance on the date you commenced your pension. You are able to pro rate your minimum pension for the number of days in the financial year that it was in place for. If you start your account based pension in June of a given financial year: There is no minimum pension payment amount for the remainder of that

5 financial year If you don t meet the minimum payment amount requirements then the entire balance of the account based pension will be treated as if it were in accumulation phase for the whole year. This will result in assessable investment earnings being taxed at 15%, rather than being received tax free. It s not enough for your fund to simply account for the minimum payment through a journal entry; funds must actually be paid from your account and leave your SMSF. Keep your records safe SMSF trustees are required by law to keep records of transactions of the fund, including those relating to pension payments. These records will also assist your accountant in substantiating your fund s tax position. Generally records relating to pension payments must be kept for a minimum of 5 years, but note that some records (eg minutes of trustee meetings) must be kept for 10 years. If you would like to seek financial advice on SMSFs and Retirement Income Planning, please Marcus Ainger, Private Client Adviser at Prime. Marcus Estate Planning If you are receiving a pension from your fund, the rules of your SMSF may allow you to nominate one of your dependants (usually your spouse) to continue to

6 receive the pension after your death, generally referred as a reversionary pension. Alternatively you may be able to nominate one of more dependants to receive either a lump sum payment or a pension after your death, or your estate to receive a lump sum payment. It is important to consider these options when establishing your pension, and it may be appropriate to review all your estate planning arrangements at this stage. If you would like to seek advice on Estate Planning, please Sophie Cohen, Estate Planning Specialist & Legal Practitioner at Prime. Sophie LEARN MORE: Estate Planning & Asset Protection incl. Legal Services RELATED POST: An Up-to-Date Will is an essential part of your Estate Plan (1) See AFSA The future of retirement income March 2015