Transitioning from the accumulation phase to the pension phase within an SMSF requires careful planning and compliance with specific Australian Taxation Office (ATO) rules and regulations. It is important to get professional advice to help ensure your fund’s compliance.
Eligibility when starting a pension in SMSF
You will be eligible to start an SMSF pension if you have met both of the following eligibility requirements:
- You have reached your preservation age (which is between 55 and 60 depending on your date of birth).
- You have met a condition of superannuation release (such as retiring from the workforce or turning 65 years of age even if you are still working).
Account-based pension or TRIS?
There are two options for starting an SMSF pension:
- An Account-Based Pension
- A Transition-to-Retirement Income Stream (TRIS).
The right option for you will depend on your specific circumstances and goals. Key considerations include whether you still want to work, the tax implications and your SMSF investment strategy and goals.
Minimum payments
If you start an account-based pension you must withdraw a minimum amount of your account balance each year to maintain your account’s tax-free status and avoid ATO penalties. The minimum annual drawdown amount depends on your age, as highlighted in the following table.
| Age | Minimum annual percentage of account balance that must be withdrawn |
| Under 65 | 4% |
| 65–74 | 5% |
| 75–79 | 6% |
| 80–84 | 7% |
| 85–89 | 9% |
| 90–94 | 11% |
| Over 95 | 14% |
If you start a TRIS, then you must ensure that you receive between 4 and 10% of your account balance each financial year. Once you fully retire, you can transfer from a TRIS to an account-based pension or access your super as a lump sum or do a combination of both.
Requirements
If you want to start an account-based pension or TRIS within your SMSF, then you and any other trustees of your fund must ensure all of the following:
- That your fund’s trust deed permits pension payments.
- That the funds you allocate for your account-based pension or TRIS will be sufficient to meet the pensions income payments. .
- The ATO is notified of the pension’s commencement.
- Compliance with ATO minimum drawdown amounts (and maximum drawdown amounts for TRIS).
- That you regularly review your pension or TRIS strategy and continue to ensure your ongoing annual ATO reporting and compliance requirements.
It is also a good idea to:
- Review your fund’s investment strategy when you start an account-based pension or TRIS, especially if you have members in different phases. Unlike retail funds, which can require the sale of investments to transition into a pension phase, an SMSF allows for the commencement of pension payments without liquidating assets, providing greater flexibility. Sufficient liquidity is paramount for SMSFs to ensure you can meet pension payment obligations without needing to sell assets. Any investment strategy needs to be appropriate for all members of the SMSF:
- For example, in the scenario where an SMSF has two members, and only one begins drawing a pension while the other remains in the accumulation phase, it is essential to verify that the investment strategy of the fund aligns with the needs of both members.
- Review your will and estate planning needs, such as your beneficiary and reversionary pension nomination/s.
The bottom line
When starting a pension within a Self-Managed Super Fund (SMSF), it is crucial to notify the Australian Taxation Office (ATO) of the pension’s commencement and to regularly review the pension strategy to ensure compliance and optimal performance.
Starting an SMSF pension is a significant financial step, so make sure to seek professional advice from our financial advisors to ensure your pension strategy supports your retirement plan, and have your accountant manage the annual compliance and tax requirements.
This content has been prepared by Wilson Pateras to further our commitment to proactive services and advice for our clients, by providing current information and events. Any advice is of a general nature only and does not take into account your personal objectives or financial situation. Before making any decision, you should consider your particular circumstances and whether the information is suitable to your needs including by seeking professional advice. You should also read any relevant disclosure documents. Whilst every effort has been made to verify the accuracy of this information, Wilson Pateras, its officers, employees and agents disclaim all liability, to the extent permissible by law, for any error, inaccuracy in, or omission from, the information contained above including any loss or damage suffered by any person directly or indirectly through relying on this information.
