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• Pension Phase

Pension Phase

The decision to move to pension phase and draw an income stream from your Self Managed Super Fund can provide some fantastic benefits once you've reached 55 years of age, regardless of whether you continue to work or not.

Benefits from a super fund may generally be paid as a lump sum, income stream (pension) or annuity, provided the member has satisfied a condition of release (for example, retirement).

There are new rules for paying income streams and annuities as a result of the introduction of the Simplification of Superannuation reforms that took effect from 1 July 2007. There are also restrictions about what money can be used to purchase an income stream and restrictions on reversionary beneficiaries.  From 20 September 2007, all new income streams and annuities need to meet the new rules.

Super income streams

From 20 September 2007, any new income stream needs to fall into either account-based or non account-based.

Account-based income streams have the following general characteristics:

• they require a minimal annual payment to be made with no maximum amount stipulated
• they can only be commuted in particular circumstances
• they can’t have a residual capital value
• they can’t be paid to a non-dependant beneficiary.

A new account-based transition to retirement income stream may be started on or after 1 July 2007.

These income streams need to meet the standards of ordinary account based income streams but are also required to have a maximum annual payment limit of 10% of the account balance. Commutations of these pensions can’t be taken in cash except in limited circumstances.

For more information on SMSF Income Streams -  Drawing a Pension from my SMSF

Non account-based income streams have the following general characteristics:

• they may be paid for life or for a fixed term or years
• they can only be commuted in particular circumstances
• certain non account-based income streams may have a residual capital value
• they can’t be paid to a non-dependant beneficiary.

Income streams started before 20 September 2007 that meet superannuation law pension rules as they existed immediately before 1 July 2007, will generally be taken to be super income streams for the purposes of the super law.

SMSFs can’t pay a defined benefit income stream unless they were paying a defined benefit pension to a member before 12 May 2004.

Outlook can provide advice to trustees and members in respect to paying an income stream or benefit payment from your SMSF, including:

• Administrative obligations required to pay benefits to fund members
• Reporting and registration requirements
• Register for pay as you go (PAYG) Withholding
• Calculation and reporting of PAYG withholding tax

Note:  Members over 60 years of age do not need to report any benefit payments as these are tax-free (unless from an untaxed source, terminal illness or injury).

Moving to pension phase within your fund may require some additional obligations throughout the financial year depending on the age of each incom stream recipient and/or whether all members are receiving pensions.  Listed below are some further requirements when converting your fund from accumulation to pension phase:

Actuarial Requirements

To claim a tax exemption if you are paying an income stream, you may need to get an actuary’s certificate to qualify for exemptions from tax on your SMSF’s income from assets used to make current pension payments as they fall due. The assets being used to provide the current pension payments are classed as segregated or the income may be exempt under a proportional method.

·          Segregated current pension assets method - The income that is exempt from tax is derived from the assets of your fund that are used to pay current pension liabilities and are segregated from other assets in your fund. The assets are specifically identified as solely supporting the payment of pensions. The tax exemption on income generated by these assets used to support the fund’s pension payments does not apply to income derived from assessable contributions or non-arm’s length income.

·          Proportional method (Unsegregated current pension assets) - A proportion of the fund’s income that is used to support the payment of the fund’s current pension liabilities is exempt from tax. The proportion is based on the average value of the fund’s current pension liabilities to the average value of the fund’s superannuation liabilities. The calculated proportion of income that is exempt from tax does not include any income generated from segregated current pension assets, non-arms length income, assessable contributions or segregated non-current pension assets.

Actuary’s certificates

If your fund wants to claim a tax exemption on the fund’s income while it is paying a pension, you’ll need a certificate from an actuary to work out the amount of exempt income from assets that support the pension payments. An actuarial certificate is required in each year that the exemption is claimed.

However, an actuarial certificate is not required if, at all times during the financial year, the only super income stream (pension) benefits being paid by the fund are of a type prescribed by the ITAA 1997. These are allocated pensions, market linked pensions and account based pension types.

Other requirements

In addition to the requirements for actuarial certificates, the following needs to be considered if you are intending to claim an exemption on income received from your fund’s pension assets:

• Before you start paying a pension, you should ensure that all assets of the fund are revalued to their current market value.
• If you are intending to use the segregated method (as discussed above) consider if your SMSF’s pension assets meet the requirement of being segregated. That is, can you clearly identify the assets dedicated to funding the super income stream benefit and there is a clear relationship established between the relevant assets and the member’s account.
• If your SMSF is not just solely paying a pension, that is, there are members who are still in accumulation phase, make sure you are keeping records in a manner that allows you to clearly identify what expenses you have and how much is related to the income earned to pay pensions. The reason for this is, if you are entitled to a tax exemption on the income that is used to pay current pension liabilities you won’t get a deduction for the expenses related to earning that exempt income and you can’t claim these expenses as a deduction in the fund’s income tax return.

There are a range of administrative obligations imposed on SMSFs under the law.  You are responsible for ensuring all these obligations are met, however Outlook's SMSF Solution ensures trustees meet their ongoing requirements and also provide advice to maximise your retirement outcome. 

Contact us  for further details how moving to pension phase can be of benefit to you.