By Graeme Colley
Executive Manager, SMSF Technical & Private Wealth

You can’t make an omelette without breaking an egg, so the saying goes. But when it comes to super you can’t start a pension without using your accumulation balance. So what do you need to do to get a pension going?
 
There are just two types of pensions that you can start from your SMSF - an account based pension and a transition to retirement income stream (TRIS). They both have similar features but a TRIS has restrictions on drawing lump sums and is counted against your Transfer Balance Cap once you have retired after reaching preservation age, currently age 58, or when you reach age 65, whichever comes first.
 

Starting a pension

Starting a pension from your self-managed superannuation fund is relatively straightforward once you know what to do. There are some things you absolutely must do, but as an SMSF trustee, you also have a fair bit of flexibility and control when it comes to how much and how often you pay the pension.
 

1. Eligibility

The first thing you need to do is work out whether you are eligible to start a pension. You can pay a pension if you’ve retired for superannuation purposes, reached age 65 or met another condition of release such as permanent disability, or are terminally ill. A TRIS can commence once you have reached your preservation age which is currently 58, but from 1 July 2022 preservation age will increase to age 59.
 

2. Check the trust deed

Make sure you check your SMSF’s trust deed as it should allow you to commence a pension such as an account-based pension or TRIS. If you can’t commence a pension then it may be necessary for you to have the trust deed amended to get the pension underway.  
 

3. Value the fund and pension assets

The next step is to value the assets of your SMSF which are required to meet the ATO valuation guidelines. The starting amount for the pension should be based on the market value of the fund’s investments when the pension commences. For ongoing pensions, you will use the value of the fund’s investments as at 1 July in the financial year. The amount used to commence the pension will count towards your Transfer Balance Cap of between $1.6 and $1.7 million (see more below). Any valuation of the fund assets should be based on objective and supportable data. For example, listed shares are readily available from the media or stock exchange. However, private company shares, and units in a private unit trust as well as real estate, artworks, and collectibles may require an independent valuation from someone who is qualified.
 

4. Understand your Transfer Balance Cap

The amount used to start your pension is fixed at the time it commences. It is not possible to add contributions to your pension balance or transfer amounts from your accumulation account without first stopping your pension. The combined starting value of any pensions you have in retirement phase is limited to your Transfer Balance Cap. Your Transfer Balance Cap will be an amount between $1.6 and $1.7 million and depend on whether you commenced a retirement phase pension prior to 1 July 2021. As an example, anyone who commenced a pension from their SMSF for the first time from 1 July 2021 will have a Transfer Balance Cap of $1.7 million. However, anyone who commenced a pension before that time will have a Transfer Balance Cap of at least $1.6 million.
 

5. Understand the minimum pension amount

There is a minimum annual pension amount you need to pay each year. For the 2021/22 and 2022/23 financial years, the minimum pension required to be paid as a percentage of your opening balance is:

Source: ATO
 
Before commencing your pension it is advisable to write to the trustee to include details of:

‐ the amount you wish to use to start the pension,
‐ the amount of pension you wish to receive such as an amount equal to at least the minimum pension percentage,
‐ how often you would like it paid such as weekly, fortnightly, monthly, annually etc.
‐ whether you wish your pension to be reversionary so that it can be paid to your surviving spouse or dependants on your death.
 

6. Minute the pension commencement

Like all major fund decisions, the pension commencement should be acknowledged at a trustee meeting and a trustee minute or resolution prepared. The trustees will usually arrange for a pension agreement to be drawn up, specifying all major details of your pension and whether any variations can be made to it.

7. If required, supply a product disclosure statement (PDS)

A product disclosure statement (PDS) may need to be supplied prior to commencing the pension. However, it is not required if the trustee of the SMSF reasonably believes that the member has received or has access to the information required to be provided in the PDS. It is usual that the majority of fund members would have reasonable access to the information as they are also trustees of the fund.
 
Many trust deed providers have pro forma PDS available if required.
 

8. An actuarial certificate may be required

The income earned on the investments supporting a pension that is in retirement phase is tax free in the SMSF. Depending on how the SMSF is structured an actuarial certificate may be required which will indicate the proportion of the fund’s taxable income that is taxable and tax exempt. The SMSF’s actuary will calculate the exempt proportion of the fund’s income after the end of the financial year.
 

9. Reporting to the ATO

Even though your transfer balance cap is applied every time you commence a pension, several events that may be required to be reported to the ATO. For example, if you decide to withdraw a lump sum from your pension or transfer an amount of your pension to accumulation phase. Your SMSF administrator or tax adviser will usually report these events to the ATO at the appropriate time.
 

Cracking the golden egg

By understanding what’s required you will be able to crack your retirement savings egg and look forward to receiving your pension. However, if you’re not sure professional advice is always useful before commencing your pension, and worthwhile to start thinking about it well before retirement. 

 

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