With the introduction of the major Simpler Super reforms that came into effect on 1 July 2007, a new account based pension is now available to a member of a superannuation fund. This new pension replaces the multiple pension options including allocated and market linked pensions. There is also a variation to this pension to satisfy the transition to retirement rules for those members aged 55 or more seeking to commence a pension while still continuing to work.
From 20 September 2007 all new pensions must commence in line with the new rules and a superannuation fund’s trust deed must be upgraded if necessary to meet this requirement.
The new rules mean that from 1 July 2007 existing pensions may adopt new minimum payment rules and will be taken to meet the new rules in the pension standards in the SIS Regulations. Trustees must document the changes for these new rules to take effect.
What is an Account Based Pension?
An Account Based Pension is simply an income stream that you receive from the fund upon retirement. This simply means that periodically (e.g. each month or other period you nominate) cash is transferred from the fund’s bank account to your own personal bank account. This simply means that periodically (e.g. each month or other period you nominate) cash is transferred from the fund’s bank account to your own personal bank account.
There does not have to be any investment changes as a result of commencing an Account Based Pension. Formal notification by the member and trustees, along with minutes/resolutions need to be prepared to commence an Account Based Pension.
Benefits Summary of an Account Based Pension
There are some significant benefits to commencing an Account Based Pension from both a taxation and accessibility point of view. These include:
- The tax rate of the fund reduces from 15% to 0% on all income generated from assets funding the account based pension. This includes investment earnings such as interest, dividend, rental, and distribution income, along with capital gains tax.
- Where the tax rate is reduced to 0% and the fund is invested in listed shares that have attached franking credits, the fund will receive a cheque from the ATO each year equal to these amounts.
- The income stream recipient can access any level of income from your Fund subject to an age based minimum amount (see below, unless under transition to retirement where a 10% maximum applies).
- The income you can access is tax free if you are 60 and over.
- You can take lump sum amounts whenever you want with no limitation tax free.
- You have absolute flexibility as to when and how regular you wish to take income as long as the minimum pension amount is drawn prior to 30 June each year.
- There does not need to be a change to your fund’s investments as a result of starting a pension.
Minimum Pension Income
You will be able to choose the amount you take as an Account Based Pension each year subject to a minimum percentage drawdown of your account balance depending on your age as follows:
|Member Age||% of account balance to be taken|
|55 to 64||4%|
|65 to 74||5%|
|75 to 79||6%|
|80 to 84||7%|
|85 to 89||9%|
|90 to 94||11%|
The percentage is applied to the balance of your Fund at July 1 each year to determine the minimum amount that must be drawn in the relevant year.
There is no maximum amount you need to take, unless being paid under the Transition to Retirement Rules (10% maximum applies). Importantly any amount you take as an Account Based Pension is tax free after 60.
Can I contribute after commencing an Account Based Pension?
The commencement of an account based pension does not preclude you from contributing to your fund; however there are contribution rules which must be adhered to surrounding your age and contribution limits. You cannot add to an Account Based Pension (unless stopped and repurchased), however you can create a second interest (account) within the fund.
Commencing a Account Based Pension
When you are ready to commence an Account Based Pension, Outlook as part of our SMSF solution will attend to all aspects of the Account Based Pension setup process for you. As member and trustee you will need to sign this documentation.