The Nitty Gritty of SMSF Pensions


SMSF pensionsOver the past few years, SMSFs have evolved a lot. It has become the most common way to save for your retirement days as it gives you more control as well as choices regarding your funds and investment decisions. Besides securing your retirement days, this way of earning allows you to commence a pension which is referred as “Better than a tax haven”. But, what makes this SMSF pension so appealing to SMSF members? Well, there are a number of reasons why people decide to move into pension phase, but the most common ones include: retirement, pre-retirement tax minimisation strategies, temporary or permanent incapacity, and a lot more.

The rule of thumb says that establishing SMSF pensions is possible once you have reached your preservation age which currently is 55, and the benefits of commencing one are many, starting with tax free environment (you won’t need to pay any tax on any income or capital gains). Once you have established a pension from your SMSF, you will start receiving periodical payments from your SMSF.

Types of SMSF Pensions

An SMSF member can choose between two types of SMSF Pensions:

  • Account Based Pension
  • Transition to Retirement (TTR)

Account Based Pension

The Account-based pension gives you an unlimited access to your superannuation, but in order to be eligible for this one, the preservation age of 55+ must be reached, or the person must be at the age of 65 and retired. This type of pension also requires a minimum pension payment that has to be paid annually, while there is no maximum limit on pension withdrawals.

Transition to Retirement (TTR)

Transition to retirement pension, on the other hand, can be commenced once the member has reached preservation age even though they are not retired. This type of pension runs almost the same way as the account-based one, the only difference being that you cannot withdraw lump sums. And while there is no upper limit on pension withdraws from the annual-based pension, in a TTR account, the maximum payment is 10% of the account balance.

The thing that is applicable for both Account-based pension and TTR is that the withdrawal is based on your age at the beginning of the financial year.

Commencing an SMSF Pension

Regardless the type of investment you are planning to start, before you do it, you need to follow some important rules I’ve listed below.

  • Consulting the Deed – You need to ensure that your fund’s trust deed will allow pension payment.
  • Review the Investment Strategy – You need to make sure that your fund’s investment strategy reflects the rest of the member’s retirement needs, and if necessary, make some changes and adjust it accordingly.
  • Make Sure the Pension Fund Income is Tax Exempt – This can be done by using the segregated method and unsegregated method and obtain an actuarial certificate which is required for those of you who are partially in Accumulation mode and partially in Pension or TTR mode.
  • Register for PAYG “Pay As You Go” withholding tax – This is required if you are under the age of 60, and if the payments have a taxable component.
  • Complete the Pension Commencement Minutes – Once you do this, you are ready to enter the pension phase.