SMSF Pensions – Money going out of your Self Managed Super
There are special rules that apply to the payment of superannuation benefits. No superannuation benefit can be paid until you reach a ‘condition of release’. A condition of release can occur under a variety of circumstances dependent on age, death or incapacity.
Self Managed Super and ‘Condition of Release’
For example, the ability to pay yourself out of your super fund can start as early as age of 55 – either as a pension or by lump sum. Where you are age 60 or over, the payment of super benefits can be taken tax-free. They don’t form part of your income. You don’t pay tax on them.
Retirement from the workforce is a condition of release. If you are not retired and not 60 years of age, any super benefits paid to you are assessable to you personally. The tax laws help to reduce tax on these payments by way of tax offsets (or rebates), whether taken as a pension or lump sum.
Super benefits are subject to preservation requirements. Depending upon what age and when you start getting paid your super determines how much you can take in any year. An example of this the payment of a transition to retirement income stream (see more below).
Receiving Lump Sum Payments from your Self Managed Super Fund
When receiving a payment from a SMSF as a lump sum it doesn’t have to be in cash. It can be in kind or what is referred to as “in specie”. The benefit could be shares or property. So long as it comes from your super fund and the fund’s trust deed allows for this to occur.
Receiving Pension Payments from your Self Managed Super Fund
Income from SMSF can also be paid to you as a pension or what is now referred to as an “income stream”. These payments can only be made in cash. The law now only allows a SMSF to pay what is called an account based pension. It depends on how much is in your account as to the amount of the pension that is paid. This is calculated at the beginning of every financial year. The account based pension requires a minimum pension to be taken each year. If you want to, you can stop all or part of the pension at any time you like.
An account based pension also lets you nominate a reversionary beneficiary. This is someone who you want to get the benefit of your super when you’re gone, such as a spouse. They will continue to receive payments in the event of your death exactly the same as you got when you were alive.
Once you commence a pension all of the income that was taxed in your SMSF before is exempt from tax (0% tax rate). This is regardless of the amount of assets held within the Fund. There are situations where some Funds have members who are receiving a pension and still accumulating. These Funds are subject to special rules and may need the assistance of an Actuary to determine the percentage of the Fund that is exempt from tax.
Transition to Retirement (TTR) Income Streams
Working and getting paid by your super fund is called “Transition to Retirement” or “TTR”.
TTR allows the person receiving the payment from their super fund (an income stream), to draw a limited pension and make contributions into super at the same time. This gives people the ability to contribute more to super without having less money to live on each week.
How does TTR work within your SMSF?
The key requirements are:
- It must be an account-based pension, however it is non-commutable, that is, you cannot access the underlying capital.
- There is a minimum payment equal to 4% of the account balance at the commencement of the financial year that you start TTR (currently 2% with Government announcement allowing 50% reduced minimum to be taken because of the global financial crisis).
- The maximum amount of income paid to you is no more than 10% of the account balance at the commencement of the financial year that you start TTR.
- There is no provision made for an amount or percentage to be left over when the income stream ceases.
- The TTR can be transferred only on your death to one of your dependants. It can be cashed as a lump sum and paid to a dependant, non-dependant or your estate.
- The capital value of the income stream and the income from it cannot be used as security for borrowing.
There are strategies available to you as part of building your retirement plan that can be of real benefit.
It is possible to undertake what is called a re-contribution or recycle strategy. This is when you take a lump sum or pension from your SMSF and re-contribute it straight back as a non-concessional contribution to your Self Managed Super Fund. The benefit of this strategy is that it can change your pension benefit. It can also benefit your estate planning when your death benefits are paid to non-tax dependants such as adult children.
There is no better tax environment in which to hold assets than in your self managed super.
If you have Australian listed shares in your SMSF and the Fund receives franked dividends, the imputation credit of 30 cents in the dollar is fully refunded each year as part of the fund’s annual tax return. This can potentially add 1% or more to the overall fund performance each year.
Whilst you can be paid a pension from your SMSF, it is not compulsory for you to do so. You can leave your money to accumulate in super up until you die, or you can simply draw lump sums when it suits you. Some people actually use their SMSF as an estate planning vehicle. They use their SMSF to accumulate wealth for the next generations of their family within a low tax environment.
Need more information on SMSF Pensions and Lump Sums?
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