Switching your SMSF to pension mode: Starting a transition to retirement pension

If you've turned 55 you can start a super pension. We explain how.

Key Points

  • Most people will start by taking a transition to retirement pension
  • Start with your trust deed
  • ‘Pension kits’ are available from a range of online providers               

You’ve spent years, possibly decades, building up your super and you’ve finally hit the ripe old age of 55 (the current preservation age). It’s time to think about switching your SMSF to ‘pension mode’.

First cab off the rank, when it comes to super pensions, is the transition to retirement pension (TTR). Unlike the ‘regular’ account-based pension, a TTR can be taken while you’re still working. Like an account-based pension, you’re required to make minimum withdrawals, but a TTR has the added restriction of you not being allowed to take more than 10% (based on opening account balance) each year.

Should I take a TRP?

The benefit of taking a TTR is that it puts your super account in pension mode, making it tax-free. If you’re under 60, you’ll be taxed on the TTR at your marginal tax rate, but with a 15% tax offset (credit). If you’re 60 and over, the pension is tax-free.

A TTR strategy makes most sense when drawing a pension allows you to make a larger salary sacrifice (or deductible) contribution to super (non-concessional contributions), or a high level of income in your fund (for instance, you’ve realised a capital gain), the story might be different.

Once you’ve decided to take a TTR, the next question is how you do you go about it?

Consult your trust deed

First step is to read your SMSF’s trust deed and see what it says about pensions, since the trustees must comply with it. Ideally it will say very little, giving you maximum flexibility to pay pensions as the trustees see fit. But it should give a fund with individual trustees the power to pay a lump sum benefit – assuming you might want to pay a lump sum one day – otherwise the SIS Act won’t allow it.

Provider Website
Table 1: Online document providers
Cleardocs preservation age and you’d like to commence a pension. You also indicate the date the pension is to start, what percentage you require and the frequency (for example, monthly).

If you wish, you can start a pension on 1 July and not take a payment until as late as the following June (which helps in the year you turn 60, as pension payments become tax free from your birthday onwards).

If you’re nominating a reversionary beneficiary (See segregating the fund’s assets. If the fund is to be segregated we recommend having two separate bank accounts, with one designated as the ‘pension account’. In this case, pension payments will come from here. We’ll cover the question of whether to segregate in a future article.

Investment Strategy

The shift to pension mode means you’ll also need to reassess your investment strategy. You’ll need to consider whether to focus on more income-oriented investments and also address the fund’s liquidity needs, given the need to make pension payments. Liam typically sets out, in the investment strategy document, the next five years’ cash requirements and confirms that the adopted strategy meets the requirements.

Essentially, as a trustee, you’re aiming to show that you understand your pension payment obligations and are investing to meet them.

Final comments

It’s easy to get blasé about the paperwork, but don’t. Liam has experience picking up the pieces when accountants have left it until after the financial accounts are completed to ‘fill in the paperwork’. Interim events – for instance, the death or incapacity of a member – can you leave you with a mess (including not having a valid pension).

Given the cost involved in buying a kit (especially relative to the damage mistakes can inflict), we don’t recommend trying to do this completely on your own. If you’re reviewing the appropriateness of your current trust deed, be sure you know what you’re doing.

If in doubt, we strongly recommend seeking personal advice. And, of course, we’re available to answer your questions via our Q&A function.

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