How to start an SMSF pension
Check you’re allowed to access your super
There are strict rules about accessing super – don't get these wrong.
First, check you’re allowed to do so – your adviser, accountant, or fund administrator will be able to help. In short, if you’re over 65 there won’t be a problem. If you’re under 60 you probably can’t access your super (there are very limited exceptions). If you’re in between you can start a pension but it might come with some extra restrictions if you haven’t retired.
Until then, it's important that you don’t use your super to meet personal expenses or invest in things not allowed by super law.
Decide how you want to do it
In an SMSF, most people start taking out their super by starting a "pension". An SMSF pension is quite different to the age pension in that it's not provided by the government or a product you buy from a financial institution. It doesn't mean you sell down the fund's investments to move your money somewhere else. It is simply the name given to the way you draw money out of your SMSF.
Some people don’t start pensions and instead take what’s known as a “lump sum”. This might be suitable for someone who just wants to access some of their super now as a once off but doesn’t want to keep taking money out of super each year.
The reason most people start pensions rather than taking lots of lump sums is that funds paying pensions get a special tax break. They stop paying income tax on some or all of their investment income (dividends, rent, interest etc as well as capital gains).
In this article, we’re just talking about the steps required for a pension.
You'll need to make some important decisions
These include:
- when you want it to start (and that can be any time from “today” onwards but you can’t decide to start one retrospectively);
- with how much (all your super? just some?) – remember most pensions are limited by the transfer balance cap <link to the new article I wrote for an earlier page>; and
- whether it should continue to your spouse when you die.
Document these decisions & lodge reports with the ATO
We’ll do things like:
- Check your trust deed allows the pension and whether or not there are any special conditions,
- Check you’re allowed to access your super,
- Give you some documents to sign that record your decision to start the pension and (just as importantly) the trustee’s agreement to let you,
- Inform the ATO that your pension has started so they can add it to your records for transfer balance cap purposes.
(Pensions known as “transition to retirement”pensions don’t actually need to be reported to the ATO. We’ll explain that at the time.)
Start drawing your pension
In fact, this can happen as soon as the trustee has approved the decision to start a pension, even if the documents aren’t in place yet. In an SMSF, you have complete flexibility in how you actually pay your pension to your personal bank account. You can take payments:
- On a regular basis – Set up a regular transfer from your SMSF cash account to your personal bank account.
- As you need them – Transfer money to your personal account as and when you need it, feel free to just make ad hoc transfers online. Some people even just pay household bills from their super fund. (This can get tricky if there are lots of transactions – generally it’s better to pay larger amounts to your personal account that you use to cover all your expenses.)
For any transactions you make be sure to include information to make it clear what the payment is (e.g. "Monthly pension for Peter"). If you think you might take more than the minimum amount you’re obliged to draw, talk to your accountant about the different ways you can structure this. <link to our client guide on structuring pension payments>
The one rule you do have to follow when making pension payments is they have to be in cash. While it’s not illegal for people who are allowed to access their super to transfer SMSF assets to their own name in lieu of a cash payment, that can only be done for lump sums, not pensions.
Check you’ve taken enough at the end of the year
All pensions have a minimum payment requirement and if you don’t draw enough, your fund will lose the tax break on its investment income. If you’re a Heffron administration client, we’ll let you know how much to take each year and we’ll remind you towards the end of the year. But remember we can’t actually transfer money from your super fund to your personal bank account. You’ll have to make sure you do that yourself.
If you're still under 65 and not yet fully retired, there may also be a maximum amount you're allowed to take each year.
If you are a Heffron Administration client you can monitor where you’re up to with your pension payments by logging into the Heffron Administration Portal.
What you don’t need to do when you start a pension in your SMSF
Put up with delays
As long as you’ve already checked you’re allowed to start a pension, you don’t need anyone else’s permission to start a pension. That means it can happen instantly and you can start taking money out straight away. There is no need to wait for paperwork or fill in forms.
Stop contributing to super
There are rules about making contributions to super but these depend on your age and total super balance, not whether or not you’ve started pension. In fact, any arrangements you have for (say) regular contributions can just continue – they can keep going unto the same bank account (see below).
Sell investments or move to a new account
In an SMSF, starting a pension involves your accountant or SMSF administrator making changes to the record keeping in the background but you’re not actually “moving” investments or cash to a new account. The fund still has just one investment portfolio and bank account. In fact, the SMSF’s bank account from which you’re making your pension payments will also be receiving contributions if you or another member are still making them. This can be great for managing cash flow and avoiding selling investments unnecessarily.
This is quite different to a public fund.
Start a pension with all your super
If you can’t, or don’t want to, start a pension with all your super, the leftover amount can be left in your SMSF. Your accountant or fund administrator will track two separate “accounts” for you – your pension and “the rest” (called your accumulation balance because it’s still accumulating in your fund). But importantly, your SMSF still just has one investment portfolio, one bank account etc.
Again, this is quite different to public super funds.
