What to consider prior to starting a pension
Something that we all look forward to when it comes to retirement is being able to start a pension. Paying a pension from an SMSF offers members more control and flexibility. As a trustee, you can decide what assets will be supporting the pension and how much pension will be paid.
There are a number of important factors to consider when paying a pension from an SMSF. To start a pension you must first satisfy one of the conditions of release before you release any funds. You must also check that the governing rules of the super fund allow the condition of release as it is possible that a benefit may be payable under the super laws but not under the rules of the SMSF. The most common conditions of release for paying benefits are that the member:
- has reached their preservation age and retires
- has reached their preservation age and begins a transition-to-retirement income stream
- ceases an employment arrangement on or after the age of 60
- has turned 65
Payment of benefits to members who have not met a condition of release can trigger significant penalties. The amount will also be taxed as ordinary income at the member's marginal tax rate.
|Date of birth||Preservation age|
|Before 1 July 1960||55|
|1 July 1960 – 30 June 1961||56|
|1 July 1961 – 30 June 1962||57|
|1 July 1962 – 30 June 1963||58|
|1 July 1963 – 30 June 1964||59|
|After 30 June 1964||60|
Transition to retirement pension (TRIS)
If you have reached your preservation age and still working you can access your super benefit without retiring provided the funds trust deed allows this type of income stream to be paid. The pension pays a regular income comprised of interest and capital until the account runs out. A TRIS has the same rules as an account-based pension but with added requirements:
- You must not exceed 10% of the account balance out as a pension payment for the year that the TRIS is started and for each subsequent financial year,
- Earnings are taxed 15% within the TRIS, and
- A TRIS does not count towards the 1.6m cap until one of the other conditions of release has been met.
Ceases an employment arrangement on or after the age of 60
If you have reached the age of 60 and ceased employment you are now able to access your super benefit. If you cease your current employment arrangement but continue another employment relationship, you may cash all benefits accumulated up to that time. Any super that you accumulate with your new employer must be preserved until you meet another super condition of release. It is important to note that in superannuation, ceasing employment on or after the age of 60 is different to retiring.
To satisfy the retirement requirements you must:
- Have reached your preservation age,
- Have ceased gainful employment, and
- Not have any intention of becoming gainfully employed in the future.
If you have reached the age of 65 you may now access your fund benefits at any time. There are no restrictions which mean that the benefits can be paid as an income stream ( Account-Based Pension) or a lump sum.