The job of your self-managed superannuation fund, or SMSF, is to enable you to build your financial assets to provide for a comfortable, well-funded retirement. In retirement, your SMSF can either provide a lump-sum payment or a super pension income stream to support you. So how does one make pensions work with an SMSF?
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Knowing the Types of Pension Income
There are two main pension types that you can commence with your SMSF: a simple account-based pension (SABP) or a transition to retirement pension (TRIS or TRAP).
Which pension type you’re eligible to pursue depends on your age and retirement status.
To be eligible to receive an SABP, you’ll need to be aged 65 or older or aged between preservation age and 64 and retired.
To be eligible to receive a TRIS, you’ll need to be aged between preservation age and 64 and not retired.
Receiving a Simple Account-Based Pension Income
If you qualify to transition to a simple account-based pension income, you’ll need to ensure that your self-managed superannuation fund is set up to allow the transfer of an account-based pension. Consult a legal professional to check your trust deed to ensure that all relevant permissions and stipulations are in place.
Once you’ve met all necessary requirements, you can begin to receive regular income payments withdrawn from your self-managed superannuation fund.
Make sure to keep clear records of your super fund’s transactions, including those relating to your pension income. These records are a legal requirement and will assist your accountant and/or financial advisor in managing your fund’s tax obligations.
Understanding the Impact on Investments
When you transition your self-managed superannuation fund to pension mode, you can expect some changes to your investment strategy, though investments themselves will remain unchanged.
The investment income your SMSF earns during the pension phase is, in most cases, tax free. This means that your existing investment strategy may require some minor adjustments to suit your new financial needs and circumstances.
The impact of negative returns can sometimes be greater when, by receiving a pension, you’re withdrawing wealth from your super account instead of adding to the fund in the accumulation phase accompanied by working life.
As you reconsider and revise your investment strategy, consider new risks and changes to your super wealth, and work with a finance professional to curate strategies that are as effective as possible, all with a focus on your goals for your super.
Knowing How Much Pension to Withdraw
One of the important requirements of receiving an account-based pension is that you withdraw the minimum payment amount each financial year.
The minimum pension withdrawal amount operates using a percentage-based system and varies depending on your age. This minimum amount ranges from as low as 4% at under 65 years of age to 14% for over 95-year-olds.
It’s important to be aware of your minimum annual pension withdrawal amount. This way, you can ensure that you meet withdrawal requirements and do not lose your pension’s tax-free status, reverting to the 15% tax rate of the accumulation phase.
You’ll also be able to make decisions about your SMSF assets and investments as your accumulated wealth is used to fund your retirement.
Navigating Estate Planning
When you begin to receive a pension from your self-managed superannuation fund, it’s a good idea to start thinking about estate planning.
In some cases, the rules of your SMSF may allow you to nominate a dependant (often a spouse) to continue to receive a pension from your fund after your passing. This is called a reversionary pension.
As an alternative, you might choose to nominate for a dependant or your estate to instead receive a lump sum payment from your SMSF after your death.
By making these arrangements early on, you’ll be able to make the most of the high degree of financial control made possible by a self-managed superannuation fund, planning for your accumulated wealth to go towards supporting your family.
As you transition to retirement and begin to receive a pension from your SMSF, you’ll start to reap the rewards of years of saving, investing, and value adding, enjoying the benefits provided by a thriving super fund in the post-retirement years.
Get In Touch
The team at Mint Super Audits works hard to reduce your anxiety about SMSF audits. If you have any questions or concerns, please don’t hesitate to contact us and we can put you in touch with one of our qualified auditing supervisors here at Mint Super Audit for smsf audit services such as discussions about how pensions work with an SMSF.