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Why and when should I start a pension?

A pension is a superannuation product that allows you to draw a regular income from your accumulated superannuation savings.

It is a common strategy to access your superannuation savings in retirement in the form of a pension. Drawing a pension has specific tax benefits compared to withdrawing superannuation as a lump sum:

  • Payments taken from a pension are tax free to those over 60;
  • Income earned on assets in pension phase is tax free to the superannuation fund.

Whether you are allowed to start a pension will depend on whether you have met a condition of release. These conditions apply to ensure superannuation is used solely for the purpose of funding retirement and generally relate to your age and working status.

For example, an individual born before 1 July 1960 who ceased employment at age 55, with no intention to work again, would meet a condition of release to start a pension. You can start a pension when you reach age 65, even if you haven’t retired.

You can also choose to start a ‘transition to retirement’ pension when you are not fully retired to supplement your income as you reduce your hours in employment.

There are a number of steps you must complete to start a pension as well as a number of ongoing compliance requirements.

Assuming a condition of release has been met you can choose to start a pension at any date during the year, and you can have more than one pension in your SMSF. You cannot, however, add to a pension through making more contributions, or change the terms of the pension, once it has commenced.

To start the pension you need to complete appropriate pension documentation to set the terms of the pension. This includes deciding whether the pension will revert to your spouse when you pass away and revaluing the fund assets so you know the value of the pension.

Each financial year you will need to draw a minimum amount from your pension in order to comply with the pension standards. These minimum pension drawings are set out in legislation and are a proportion of the account balance at the start of each financial year. For example, a 55 year old would need to draw a minimum of four per cent of the account balance in order to comply with the pension standards. If you are receiving a transition to retirement pension you also have a maximum amount you can withdraw each year. The maximum is equal to 10 per cent of the pension account balance at the start of the financial year.

If you are a receiving a pension from your SMSF you will be required to calculate the Exempt Current Pension Income (ECPI) of the fund each financial year. This is the income earned on the assets supporting that pension and is exempt from tax. It must be reported in the SMSF's annual return. If your SMSF has a combination of pensions and accumulation assets, you may require an actuarial certificate each year to assist you in calculating ECPI.

Doug McBirnie, senior actuary, Accurium 

Why and when should I start a pension?
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