SMSF Pension setup and management
Starting a pension in your SMSF is a great way to draw down on your super savings and pay no tax on income in pension phase. Here’s a step-by-step guide on how to set up a pension, make payments, and manage it annually.
Check your SMSF Trust Deed: Before starting a pension, ensure that your SMSF Trust Deed allows for the commencement of pensions. If not, you may need to vary your deed.
Decide on the type of pension: In an SMSF, you can start an account-based pension or a transition to retirement income stream (TRIS), depending on your age and employment status. An account-based pension is a regular income stream bought with money from your super after you’ve retired and reached your preservation age.
A TRIS allows you to access your super as a non-commutable income stream, even if you’re still working, as long as you’ve reached your preservation age.
Review your Investment Strategy: It’s essential to review and potentially update your SMSF’s investment strategy. Consider the changed focus from accumulation to income generation, while managing risks and ensuring liquidity to make pension payments.
Document the Pension Commencement: The start of the pension must be documented in writing and agreed to by the trustees. The document should specify the type of pension, the commencement date, the amount of super benefits used to purchase the pension, and the expected frequency and size of the pension payments.
Calculate the Minimum Pension Payments: You must ensure you withdraw at least the minimum pension payment each year. The minimum amount depends on your age and the starting balance of your pension at the start of each financial year (or the commencement day for the first year). SMSF members can segregate property assets or shares that pay dividends to form a pension. These assets are typically highlight beneficial in pension phase due to imputation credits and tax free rental income from a SMSF rental property that keeps up with inflation.
Make Regular Pension Payments: Pension payments must be made at least annually. However, you can choose to make more frequent payments (monthly, quarterly, etc.). Ensure that you meet the minimum pension payment amount.
Review and Adjust Pension Annually: The pension balance and minimum pension payments should be reviewed and recalculated at least annually, typically at the start of the financial year. This ensures that you continue to meet the pension rules and your retirement income needs.
95 and over
Please note that due to the COVID-19 pandemic, the Australian government temporarily reduced the minimum drawdown rates by 50% for the 2019-20, 2020-21, and 2021-22 financial years
Total superannuation balance on 30 June 2023 on balance on 30 June 2023
Bring forward amount if triggered in 2023/24 if triggered in 2023/24
Bring forward period if triggered in 2023/24
Less than $1.68m
$1.68m to less than $1.79m
$1.79m to less than $1.9m
$1.9m or more
Please note that these figures are for illustrative purposes only and may not reflect the actual values set by the ATO. Always seek advice on Total Super Balance, Non-Concessional Contribution caps, and bring forward rules.
Taxation and Reporting: Pension payments are tax-free for those over 60 years. For those under 60, the taxable portion of the pension income may be taxed at your marginal tax rate, but a 15% tax offset can apply. Also, your SMSF will need to report the pension to the Australian Tax Office (ATO) as part of its annual return.
Keep Detailed Records: All decisions, calculations, and transactions related to the pension should be documented and kept as part of the SMSF’s records. SMSF members manage pension payments by drawing the pension income monthly or annually by the cash management account for the super fund and by referencing the transaction as EG: Pension payment David – $3,500 this makes it easier to recognise the payment as a pension drawdown.
Setting up and managing a pension in an SMSF requires careful planning, regular monitoring, and compliance with super and tax laws. Therefore, it’s a good idea to seek professional advice to ensure you’re meeting all obligations and making the most of your retirement savings.
Disclaimer: This information is general in nature and does not take into account your personal circumstances. Before acting on this information, you should consider its appropriateness having regard to your personal objectives, financial situation, and needs. You should consider obtaining financial, legal, or tax advice before making any decision about setting up a pension in an SMSF.