All You Need to Know About Starting an SMSF AccountBased Pension
An account-based pension is a popular strategy for SMSF Self-Managed Super Fund members entering retirement. It offers a flexible income stream while allowing your retirement savings to continue growing. However, starting an account-based pension involves a series of critical steps to ensure compliance and effective fund management. Here's a breakdown of the key steps for trustees.
- Member Request and Trustee Acknowledgement
Key Actions:
The member must provide a written request confirming they satisfy a condition of release, such as reaching preservation age or retirement.
Trustees should acknowledge the request by:
Documenting it in meeting minutes.
Keeping supporting evidence, such as proof of the condition of release, on file.
Include details such as:
Pension commencement date.
Capital sum used.
Annual pension amount and payment frequency.
Estate planning preferences (e.g., reversionary beneficiaries or binding death benefit nominations).
- Review the Trust Deed
Purpose:
Ensure the SMSF trust deed permits:
Payment of an account-based pension.
Meeting estate planning preferences.
Compliance with legislated pension standards.
Amendments to the trust deed may be required to accommodate pension payments. Trustees must follow the amendment process specified in the deed.
- Confirm Pension Request Feasibility
Trustees must verify that the SMSF has sufficient assets to meet the pension request and ongoing obligations.
Written confirmation should be provided to the member.
- Prepare Liabilities and Tax Provisions
Ensure sufficient funds are allocated to cover:
Liabilities such as taxes and fees.
Pension liabilities.
Collaborate with accountants or tax agents for accurate calculations.
- Determine Member Entitlements and Taxation Components
Establish the member’s account balance.
Calculate the tax-free and taxable components to determine:
The tax treatment of each pension payment.
Proportions for lump sum withdrawals or death benefit payments.
- Value Assets
Assets must be valued at market value prior to commencing the pension.
Interim accounts may be required to assist actuaries in determining exempt current pension income (ECPI).
- Choose the Accounting Method: Segregated vs. Proportionate
Segregated Method:
Specific assets are allocated to fund pension payments, and income from these assets is exempt from tax.
Suitable if:
All fund members are in retirement phase.
Combined pension balances match the market value of total assets.
Proportionate Method:
Requires an actuarial certificate to determine the percentage of income that is tax-exempt (ECPI).
- Review Investment Strategy
Ensure the SMSF’s investment strategy supports pension liabilities and aligns with:
Risk and return objectives.
Diversification and liquidity requirements.
- Establish the Pension and Review Death Benefit Nominations
Determine fixed proportions of tax-free and taxable components.
Review and update death benefit nominations to reflect member preferences.
Tip:
Ensure nominations are valid under the trust deed.
Reversionary nominations should take precedence where appropriate.
- Compliance and Reporting
Tax and PAYG Requirements:
Register the SMSF for Pay-As-You-Go (PAYG) withholding if members under 60 receive taxable pension payments.
Lodge PAYG payment summaries for members under 60 with the ATO.
Centrelink Schedules:
Prepare schedules for members seeking income support or age pension entitlements.
Transfer Balance Account Reporting (TBAR):
Report all retirement phase income streams to the ATO to comply with transfer balance cap requirements.
- Ongoing Maintenance
Conduct regular reviews of:
Pension payments to ensure compliance with minimum payment standards.
The SMSF’s investment strategy.
Maintain detailed records for tax and audit purposes.
Important Note: Failure to meet minimum pension payment requirements may result in the pension being deemed ceased, leading to the loss of tax exemptions on fund income.
