From the age of 55, you have the ability to pay yourself either a lump sum or pension out of your super fund.

Where you are age 60 or over, the payment of super benefits can be taken tax-free. They don’t form part of your income. You don’t pay tax on them.

If you are not retired, but not yet 60 and are paid super benefits, you have to pay tax on these payments.  But the tax laws help to reduce tax whether the super payment is taken as a pension or lump sum.

Super benefits are subject to preservation requirements, which means that there are strict rules about when you can access your super.  A condition of release must be reached before you can touch your super – such as retirement.

Depending upon what age and when you start getting paid your super determines how much you can take in any year.  An example of this is “Transition to Retirement”.

Lump Sum Payment

When getting a payment from a self-managed super fund as a lump sum, it doesn’t have to be in cash.  It can be in kind or what is referred to as “in specie”.   The lump sum benefit could be shares or property, so long as the asset transfers from your super fund.  The trust deed must also allow for a lump sum to be made in-specie.

Pensions/Income Streams

Amounts from super can also be paid as a pension. These are now called “income streams”.  These payments can only be made in cash.  The law only allows an SMSF to pay what is called an account based pension.

The minimum level of pension that can be taken depends on your age.  This pension amount is calculated based on your age when you commence the pension and then at the beginning of every financial year.  You can stop all or part of the pension at any time you like.

An account based pension lets you nominate a reversionary beneficiary. This is someone who you want to get the benefit of your super when you’re gone such as a spouse.  They will continue to receive payments in the event of your death. This will be exactly the same as you got when you were alive.  Remember though, you cannot use a pension cannot be used as a security for any borrowings.

Once you commence a pension, all of the income that was taxed in your SMSF before (@ 15%) is now exempt from tax (0%). This is regardless of value of the fund’s assets.   There are some funds that have members who are receiving a pension and still accumulating.  These funds may require the assistance of an Actuary to determine the level of tax exemption for the fund.

Transition to Retirement

You can work and draw a pension from your super fund; this is called “Transition to Retirement” or “TTR”.

TTR allows a person to receive a payment from their super fund, an income stream, whilst making contributions into super at the same time. This gives people the ability to contribute more to super without having less money to live on each week.

How does TTR work?

A transition to retirement income stream is a restricted form of account-based pension, which has both a minimum pension and also a maximum amount that can be taken.  The maximum amount you can draw is 10% of the fund’s account balance each financial year.  Typically, when using this strategy, the contributions made each financial year will be consolidated with the pension account to boost pension balance and improve the tax-free status of the fund.

When paying a transition to retirement pension, you cannot access the capital of the pension.  You can convert from transition to retirement to an ordinary account based pension upon meeting a cashing condition, such a retirement.

Re-contribution Strategy

There are strategies available to you as part of building your retirement plan that can be of real benefit.   For example, it is a possible to undertake what is called a recontribution or recycle strategy.  This is when you take a lump sum or pension from your SMSF and re-contribute it straight back as a non-concessional contribution to your Fund.

The benefit of this strategy can be two-fold.  Firstly it can reduce the tax on your pension received whilst under 60 years of age, plus it can also benefit your longer-term estate planning when your death benefits are paid to non-tax dependants such as adult children.

Once you have reached age 60 and draw a pension from your self-managed super fund, there is no tax.  No tax when paid to you as a pension and no tax within the super fund.  Tax nirvana right here in Australia possibly?  There simply is no better tax environment in which to hold assets.  If your fund invests in Australian listed shares and receives fully franked dividends, the franking credit of 30 cents in the dollar is fully refunded each year as part of the fund’s annual tax return.  This can potentially add 1% or more to the overall performance each year.

Whilst you are able to be paid a pension from your SMSF, it is not compulsory for you to do so. You can’t be forced to get paid from your SMSF. You can leave your money to accumulate in super and draw lump sums when it suits you. Some people use their SMSF as an estate planning vehicle. They accumulate their children’s inheritance in a 15% tax environment.

NB.  More information will be released shortly as part of the launch of the SMSF Academy website.

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