Paying Pensions

Pension (Income Stream)

Another form of benefit available in SMSFs once you have satisfied a condition of release is to draw down on your assets as an income stream or pension. There are two primary types of pensions available to members wishing to start an income stream. These are explained below:

Account Based Pensions

Account based pensions are a very simple method of receiving income streams from your SMSF. They have the following advantages:

• You receive a flexible income stream to meet your changing needs. You are able to choose the amount of income you receive and how regularly – monthly, quarterly, half-yearly and annual payment options are generally available;

• A minimum pension payment is required, there is no maximum pension payment and no restrictions on lump sum withdrawals after age 60. The minimum pension payment is based on the below percentage factor and the value of the member’s fund balance as at 1 July for the pension year:

  Age	Percentage		Age	Percentage
  Under 65	4%		85-89	9%
  65-74	5%		90-94	11%
  75-79	6%		95 or Greater	14%
  80-84	7%

  Special Note: As a response to the Global Financial Crisis the government has made special provision to allow for a reduced minimum pension payment for the years ending 30 June 2009 and 30 June 2010. In these years the minimum percentage is reduced by 50%

• You receive other tax benefits - part of your income payments may be free of PAYG tax and investments which fund your pension will be CGT free - their earnings will also be entirely free of tax;
• From age 55 on, a tax offset of up to 15% may apply to the taxable portion of your pension payments further enhancing the tax efficiency of the income stream;
• From age 55 to 60 and fully retired from the workforce (not working at least 10 hours per week), lump sum payments from the taxable component are limited to $150,000 as a tax free amount;
• From age 60 on, all pension payments are tax free.
• You can access your capital funds at any time, which means you can make withdrawals in addition to your income payments, if you meet the retirement age guidelines;
• You are able to choose from a number of different investment options, selecting how your money is invested across the various asset classes (e.g. shares, property, cash and bonds);
• Your investment will receive favourable social security treatment under the Income Test which could potentially improve your eligibility for Centrelink benefits;
• There is no mortality risk, which means that if you die before the capital invested (plus any investment earnings) is exhausted, the balance will be paid out to your nominated beneficiary, your estate, or legal representative; and,
• If upon death, the account balance is paid to a dependant, such as a spouse or a child under 18, the lump sum will usually be paid tax free.

There are also some disadvantages with Account based pensions which Trustees and Members should consider, or get professional advice specific to their own circumstances. Some of the key disadvantages include:

• The term of an account based pension is not guaranteed which means your money may not last your whole retirement;
• Your investment returns will fluctuate depending on economic and market conditions which means your investment can increase or decrease in value;
• The amount of income you withdraw must be an annual minimum;
• Lump sum withdrawals from an account based pension taken on top of regular payments may incur lump sum tax, prior to age 60;
• Lump sum tax may also be levied on any remaining balance on death, for example if paid as a lump sum to a non-financially dependent beneficiary (such as an adult child); and,
• Your investment will be counted under the Social Security Asset Test, which may adversely impact your eligibility for Centrelink benefits.

Trasition to Retirement Income Streams

For members who have reached their Preservation Age (see the table below) but have not retired from the workforce another pension option exists. The Transition to Retirement Income Stream (TRIS) is available and provides access to their superannuation benefits while still working.

There are several points to note before considering a TRIS:

The annual pension payments are subject to minimum and maximum payments each year. The payments are based on the member’s account balance as at the 1st of July each year. The maximum and minimum amounts are as follows:

A TRIS, once commenced, cannot be commuted to a lump sum until the member has reached age 65 or satisfied a condition of release for a Lump Sum. Exceptions to this requirement may be made in the following circumstances;

• To fund Superannuation Surcharge liability,
• Due to a Payment Split under family law,
• To pay a Death Benefit to a reversionary beneficiary within the guaranteed period,
• To transfer from one non-commutable income stream to another non-commutable income stream,
• To cease the pension and move the Member back into accumulation phase

However, as pension rules can be complex Supercorp recommend that Members confirm their situation with their financial advisor before commuting any of the pension.

Transition to Retirement Income streams can be appropriate for people who want to reduce the number of hours that they are working while maintaining their level of income, for people in receipt of Centrelink benefits or for people who simply require a little extra income in the years before their retirement.

Once again, unique to SMSFs, the assets which fund the TRIS remain under your control (as Trustee) and given the tax advantages of the pension environment may be a very efficient environment in which to house your wealth.