Account Based Pensions And Allocated Pensions

Taxation and pensions

Do you have a Self Managed Super Fund (SMSF)? You will be pleased to know that the fund will not pay tax when its assets are only supporting a valid pension.

Even when the fund assets are shared between pensioners and non-pensioners the fund can be partially tax free! Read on to find out more.

Tax benefits

One of the main incentives for funds to commence paying a pension relate to tax breaks. A member who receives a pension payment will not be taxed on the pension payment.

In a normal SMSF pension payment, they will be entitled to a 15% tax offset against any tax payable on the pension.

Members over the age of 60 are currently exempt from paying tax on the pension income they receive.

SMSF pension options

Since the beginning of the Simpler Super regime, eligible members can request their super fund pay them one of two types of pension:

  • A simple account based pension.
  • A transition to retirement pension.

Account based pensions

This is the most common type of pension. When you direct the SMSF to commence the pension, your current accumulation account will be converted into a pension account. This account will then begin to pay you your pension entitlements as requested.

The rules of an account based pension include:

  • At least the minimum pension payment must be paid each year.
  • The minimums change based on your age.
  • The capital value of the pension cannot be added to (via contributions or rollover).
  • The pension can be commuted, stopped and started as required.
  • Members must have reached retirement or satisfied a condition of release.

Who has this type of pension?

This type of pension is aimed at those who have fully retired.

They have the flexibility to draw down amounts, well in excess of the minimum, as their circumstances change.

If a pension is commenced, members should realise that under the minimum pension formula, a pension fund is expected to eventually run out of money just after the life expectancy of the member has past.

It is unlikely that the pension fund will have any residual capital value.

Of course, members also have the option of not commencing a pension. In this case the fund is in accumulation mode until the death of the member.

Transition to retirement pensions

This is the new type of pension. Like a normal pension, the SMSF converts your current accumulation account into a pension account and begins to pay you your pension entitlements as requested.

However the rules are slightly different:

  • At least the minimum pension payment must be paid each year.
  • No more than the maximum pension payment must be paid each year.
  • These minimums and maximums change based on your age.
  • The capital value of the pension cannot be added to (via contributions or rollover).
  • The pension can be commuted, stopped and started as required.
  • Members must have reached their preservation age.

Tax benefits for members

There was one important “free kick” offered to SMSF members when the rules were first put in place.

A strategy was introduced whereby eligible members were allowed to salary sacrifice additional superannuation contributions from their pre-tax salary. At the same time they were able to draw a pension for the difference.

This often saves tax and best illustrated by way of example:

  • Michael is 55 and earns a $99,000 salary package, inclusive of a $90,000 salary and $9,000 worth of superannuation contributions.
  • He has a super balance of $400,000 and is eligible to commence a transition to retirement pension with a minimum pension of 3% or $12,000.
  • He chooses to salary sacrifice an additional $12,000 of superannuation contributions, commence a transition to retirement pension and draw down $12,000.
  • His taxable income is still $90,000, but he gets an additional pension tax credit of 15% of the pension income. His tax refund is $1,800 larger than it would have been.
  • His SMSF has paid out $12,000 of pension income but received $12,000 of extra taxable contributions.

To find out how to maximise your tax benefits, please enquire online with our SMSF experts today!

How much tax will I save?

Following on from the above example, although the additional tax of 15% must be paid on these contributions being $1,800, the fund income has been exempt from tax as the SMSF is solely paying a pension.

Assuming the fund earned 6% interest on its $400,000 balance, that makes $24,000 of the income tax free.

That is a saving of 15% or $3,600!

The fund is therefore better off by from the transition to retirement pension by $1,800 ($3,600 tax saving on interest, less $1,800 extra tax on contributions).

How can I maximise my benefit?

If Michael wished to boost his SMSF balance, he could choose to increase his salary sacrificed contributions even further up to his maximum limit.

This would swing the benefit further into the super fund.

Pension drawdown relief

Over the past few years the government reduced the minimum draw down requirement, to provide a concession to super fund pensioners.

The idea behind this was that fund balances had dropped after the global financial crisis of 2008 and some members would prefer not to sell down their investments at depressed prices to pay pensions.

This resulted in the minimum pension of 4% reduced by half to 2% for a few years. Then, the reduction was25%, so minimum pensions are down to 3%. Now there is currently no reduction relief.

Contact our expert team

Starting a transition to retirement pension can add thousands of dollars to your retirement nest egg whilst you remain at work.

By obtaining professional advice, you can optimize your current superannuation arrangements. Please enquire online to find out more information.

Note: this website is for informational purposes only and should not be substituted for professional financial or taxation advice.