Retirement Options in a Self Managed Fund

The choice of retirement benefits within a self managed super fund is mostly based on member preference, although the governing regulations have an impact.

In looking at the options with a view to making a choice, members will need to consider the financial implications (like tax) as well as lifestyle factors (like income in retirement) and other government services (like Centrelink).

This fact sheet is designed to provide basic information about the options. It is a starting point, rather than a way of making a certain decision. Further information and advice will be required.

In looking at the choices, it is presumed that the member has retired and has full access to the super fund monies.

Lump Sums

A popular benefit is the traditional lump sum. Tax becomes a factor in determining what proportion of the total benefit is taken as a lump sum. Any lump sum is split into its components and then tax is calculated. The components are tax-free and taxable. The tax-free component is not subject to any tax and is not included on the member’ tax return. If the member is under 60, the taxable component is taxed (over the threshold of $150000) taxed at 15%. Medicare levy is extra. If the member is 60 or over, the whole benefit is tax-free.

Account Based Pensions

In recent years, pensions have proved more popular than lump sums, mostly because of the attractive tax benefits and general conditions. A super fund that pays an account based pension does not pay tax, the member receives a pension each year but some portion is likely to be tax-free and the net taxable pension is subject to a 15% tax rebate. If the member is 60 or older, the full pension is tax-free. These tax concessions can be very attractive. In addition, lump sum withdrawals are available and any balance remaining on death can left to a beneficiary or dealt with under the member’s will.

Each year, it is necessary to calculate the range of pension payments available. The factors published in the SIS regulations determine a minimum pension and a maximum pension. If the member is retired, there is no maximum pension. If the member is working, the maximum is 10% of the account balance. The maximum ceases to apply once the member either retires or turns 65.

The member gets the choice, every year, of how much pension is paid. In addition, the member also gets to choose the payment frequency – monthly, quarterly, annually, even sporadic payments.

Complying Pensions

There are several varieties of these but most of them cannot be paid from a self managed fund.

The only variety that can be paid from a self managed fund is the market linked income stream (once called a term allocated pension). This pension operates with some of the characteristics of both complying and account based pensions, without the worst drawbacks of typical complying pensions of old. They have a set term (based on life expectancy), are recalculated each year based on the account balance and lump sum death benefits are possible. There is some flexibility in the annual pension as the member gets the choice of any figure between their own life expectancy, one for a person 5 years younger or for a life expectancy of 100 years. In addition, the spouse’s life expectancy can be used (this makes the pension reversionary) or for a person five years younger or for a spouse life expectancy of 100 years. In addition, the annual pension that is calculated can be varied up or down by 10%. Note that lump sum withdrawals are not available. Such a pension must have started by 19 September 2007, or be a rollover of a previous market linked income stream.

Other varieties of complying pensions can only be paid from larger super funds, those with at least 50 members. The first variety is the traditional lifetime complying pension. It is available once the member has reached preservation age and retired, generally at 55. The conditions are not all good – the pension is payable for life, it can continue to a surviving spouse, there can be no lump sum death benefit, the pension can only increase each year by a pre-determined indexation figure (usually CPI) and there is no access to lump sum withdrawals. They were available in self managed funds until the Budget of 2004, when restrictions were imposed. Although sharing the tax benefits of allocated pensions, these complying pensions were never popular.

The next variety was introduced later, during the late 1990’s. These are generally referred to as fixed term pensions, as they are based around life expectancy. They can only be commenced at or after age-pension age. They share most of the characteristics of the lifetime complying pensions except that they were much more common in self managed funds. That is until the Budget of 2004, when restrictions were imposed. As there was more certainty in the calculations, actuaries were happier to provide appropriate reports for these pensions. Any amount remaining on death would remain in the fund to be reallocated to other members.

All of these complying pensions share the tax benefits of account based pensions. The key difference is in the area of Centrelink benefits. Account based pensions are assessed against the assets test, whereas complying pensions are tested more generously.

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