Pensions

Simpler Super Self Managed Superannuation Fund Pensions
Please Note: Since 1st of July 2007 pensions and annuities have been referred to as income streams.

One of superannuation income streams Self Managed Superannuation Fund can provide to its members is an account-based pension. An account-based pension is a pension where a fund's account balance is allocated to a member.

Rules for pensions started before 1 July 2007 Pensions started before 1 July 2007 must continue to be paid under the previous pension payment rules unless the pension is an allocated pension. An allocated pension can be paid under the new superannuation legislation any time after 1 July 2007, without having to commute and start a new pension. This needs to be allowed by the trust deed.

Pensions started between 1 July and 19 September 2007 For pensions that started between 1 July 2007 and 19 September 2007, pensions can be drawn under the previous or new pension rules, providing this is permitted by the trust deed clauses.

Pensions that started after 19 September 2007 These pensions must meet the new pension rules and satisfy all of the following requirements:

  • The pension must be account-based, except in limited circumstances.
  • There is a minimum amount that member draws as a pension each year.
  • The pension cannot accept contributions or rollover amounts for a member once the pension has started.
  • The pension can be transferred only if a member dies to their dependants.
  • Funds paying the pension cannot be used as security for borrowing.
  • Some pensions before they are commuted must pay a minimum amount.
  • There are no maximum draw down limits for new pensions commencing after 19 September 2007, except for transition to retirement income streams.

Allocated Pension is a pension where a fund provides an income stream to the members on retirement, from a lump sum set aside (i.e. allocated) for that purpose. Allocated pensions which started before 1 July 2007 can operate under the superannuation legislation from 1 July 2007 without the need to commute and restart a new pension.

Complying Pension is a pension that must:

  • Generally be payable for life, or a long term usually in excess of 15 years;
  • Not have a capital value on the death of the member (other than reversionary pension - see below), or at the end of the term;
  • Have regular income payment amounts;
  • Generally not be commuted to a lump sum;
  • Not be used as security for a borrowing;
  • Have a relevant actuarial certificate.

Complying superannuation pensions (market-linked, lifetime and life expectancy pensions) which started before 1 July 2007, cannot be commuted in order to start another pension under the new pension rules. An exception applies for existing complying pensions which are commuted after 19 September 2007 in order to start a market-linked pension. In these circumstances, the new minimum pension standards will apply to the new market-linked pension, in addition to the rules that normally apply to market-linked pensions.

Transition to retirement Transition to Retirement allows a person who has reached their preservation age to access their superannuation through an income stream without having to retire permanently from the workforce. Access to superannuation benefits may only be allowed as:

  • A non-commutable complying income stream (complying lifetime, life expectancy, or market linked income stream), or
  • a non-commutable allocated income stream (with restrictions on the ability to commute a lump sum).

Transition to retirement pensions starting on or after 1 July 2007 must satisfy the new legislation requirements, including pension payments must be restricted to a maximum of 10% of the pension account balance as it stands at 1 July of each financial year or the commencement day of the pension.

There is also a Reversionary Pension, a situation where after a member's death, the member's pension from the fund is paid to another person.

What are the advantages of an Allocated Pension? Allocated Pension is just one type of benefit a SMSF can pay to its members. Earnings within an Allocated Pension are not taxed, regardless of these earnings being income or capital gains. Allocated Pensions are very flexible because they allow the member to choose how much income is received, or "allocated", each year, with respect to the minimum limit. With an Allocated Pension, a member is also able to withdraw lump sum amounts from the account in addition to the pension amount. The other attraction of an Allocated Pension is that any capital sum of an Allocated Pension remaining at the death of the member can be paid to the member's dependents or to the estate.

What are the advantages of Complying Pensions? Complying Pensions are another type of pension a SMSF can pay to its members. There are two types of Complying Pensions: Fixed Term Complying Pensions and Lifetime Complying Pensions. Complying Pensions are less flexible than Allocated Pensions but have other advantages.

How does an Allocated Pension work? SMSF pays a pension out of the member's benefit account. The member decides each year how much income will be paid as a pension, within upper and lower limits set out in the superannuation law. The member can choose to vary this amount each year, or even more frequently. The member may choose to withdraw capital amounts from the account. These withdrawals will be treated as eligible termination payments ("ETPs"). Tax on withdrawal is computed under the rules applying to ETPs. Allocated Pensions are usually paid for as long as there is money in the member's account or until the member dies. The term therefore depends on the age of the member, the amount in the account, how much the member draws as a pension each year, the amount of any commutations (ETPs) and the underlying investment performance of the SMSF. If a member dies the balance of the account may be used to pay a pension to a dependent of the member, or it may be paid as a lump sum to either a dependent of the member or the member's estate.

What are the Upper (Max) and Lower (Min) Limits of an Allocated Pension? SMSF pays a pension out of the member's benefit account. The member decides how much income will be paid as a pension, within lower limit set out in the superannuation law. The law specifies a formula to calculate the minimum limit paid to a member each tax year. The member must take the minimum pension amount from the fund each tax year, and because from 1st of July 2007 there is no maximum amount limit other than the balance of the super fund, the member can take the whole balance of the fund.

Do the max and min Allocated Pension amounts change each year? Yes they do, because the value of the member's account balance changes every year, as a result of changing underlying investment performance. Also, as the member ages, the factor to calculate the minimum also changes.

AgeMinimum % withdrawal
Under 65 4%
65-74 5%
75-79 6%
80-84 7%
85-89 9%
90-94 11%
95 or more 14%
Source:The ATO ,Tuesday, 3 July 2007

What is an actuarial certificate? An actuary must certify the amount of assets needed to provide a pension which are then exempt from tax on their investment earnings. In addition, for a Complying Pension an actuary must certify that the assets from a SMSF, plus future earnings are sufficient to allow the fund to meet its liabilities in paying the Complying Pension. The actuary issues a certificate stating this financial position.

When must actuarial certificates be obtained? The certificate must be obtained by the fund no later than the date at which the tax return is due for a particular financial year (so that if a 3 year certificate is obtained it must be in place when the tax return is lodged for the 1st year of the 3 year period).

How often is an actuarial certificate required? The frequency of the certificate depends on whether the current pension assets are segregated from the other assets. If they are, the actuarial certificate is required once every three years. If they are not, the actuarial certificate is required every year. In addition, a Complying Pension must have a separate actuarial report and certificate annually.

What does the actuarial certificate include? The actuarial certificate must include the following information:

  • The name of the SMSF;
  • The name of the trustee(s);
  • The year(s) the certificate applies to;
  • The date to which the values of the segregated current pension assets and the current pension liabilities relate;
  • The value of the segregated current pension assets at that date;
  • The value of the current pension liabilities at that date;
  • The expected earning rate of the segregated current pension assets;
  • The expected earning rate used to value the current pension liabilities;
  • Confirmation that the valuation follows the practice notes issued by the Institute of Actuaries of Australia;
  • A statement that the actuary expects the future value of the segregated current pension assets to be sufficient to cover the future value of the current pension liabilities;
  • The name, address and qualifications of the actuary;
  • The date of the certificate;
  • The actuary's signature.

Should I seek professional advice before I start my pension plan? Before you start your pension, you have to ensure that you are fully informed of the options available and suitable to your particular retirement circumstance. You need to obtain professional advice on these matters. This will make the process of retiring less traumatic and easier for you; it will also reduce the chances of making an incorrect decision, and therefore maximising available benefits.

In order to help you determine the advice that may be relevant to you, we have provided a table suggesting examples of the minimum advice you should obtain before you start your pension.


Glossary of Terms

"Net Asset Balance" is the amount of net assets of the fund as a whole as shown on the latest Statement of Financial Position of the fund accounts, or other accounts prepared at a relevant date.

"Member Account Balance" or "Pension Account Balance" is the amount recorded in the account maintained in the name of each member or pensioner as to their share of the net assets of the fund. In instances where there is only one member or pensioner, this will usually equal the amount of the Net Asset Balance of the Fund. Where there is more than one member, the Member and Pensioner Account Balances (together with any reserve accounts) should total the amount of the Net Asset Balance of the fund.

"Segregated Assets" - A superannuation fund that provides a pension needs to obtain an actuarial certificate to qualify for exemption from tax on the fund's income from assets used to discharge current pension liabilities as they fall due. There are two classes of certificate, depending on whether the assets being used to provide the pension payments are classed as segregated or unsegregated.

For segregated assets the requirements are covered by Allocated Pension Certificates, section 273A, or section 273B of ITAA and IT2617 together with the Institute of Actuaries Guidance Note 452. Section 273A exempts from tax the normal assessable income of the fund that is derived from segregated current pension assets. The relevant assets must be segregated at all times during the period covered by the certificate.
Section 273B covers actuarial certification for segregated non-current pension assets. Segregated non-current pension assets do not qualify for tax exemption.

"Segregated Current Pension Assets" is the total value of all assets identified and segregated to pensions either already in the course of payment or about to become so, whether segregated for all pensioners collectively or identified with individual pensioners or pensions.
For segregated assets the requirements are covered by section 273A. Section 282B exempts from tax the normal assessable income of the fund that is derived from segregated current pension assets. The relevant assets must be segregated at all times during the period covered by the certificate.
Section 273B covers actuarial certification for segregated non-current pension assets. Segregated non-current pension assets do not qualify for tax exemption.

"Unsegregated Assets" For unsegregated superannuation pension assets the actuarial requirements are covered by section 283 of ITAA 1936 and IT2617 together with the Institute of Actuaries' Guidance Note 451. In effect, the proportion of the fund's income determined by the actuary as relating to the fund's current pension liabilities is exempt from tax. In practice, a fund that starts paying a pension part way through the financial year will need this type of certificate, unless it immediately segregates the relevant assets and obtains a valuation of those assets at the date the pension commences.

"Valuation Discount Rate" is an actuarial item and will be chosen and changed from time to time by our actuaries. At any one time that rate will apply to all certificate requests.

"The Date of Report" is also determined by our actuaries and relates to when the certificate is prepared or to when second and subsequent valuations are performed.