What types of pensions can I have?

These days, almost all SMSF pensions are a particular type known as an account-based pension. A transition to retirement pension (TRP) is just the same as an account-based pension but has some extra restrictions that apply because it is being paid to someone who has not retired or met one of the other conditions of release that allow full access to the account balance. A TRP is also known as a Transition to Retirement Income Stream (TRIS). As of 1 July 2017 a TRP is not eligible for the same tax benefits that apply to an account based pension where a “full-access” condition of release has been met.


Features of an account based pension 

The main characteristics of an account-based pension are: 

  • No fixed term – the pension finishes when your account balance is exhausted. 

  • Minimum annual pension payment – you must take at least a certain amount out of your pension each year. It’s worked out by multiplying the percentage below that applies to your age by your pension account balance at 1 July that year. 
Age you reached on your last birthday Percentage of account balance

Under 65

4%

65-74

5%

75-79

6%

80-84

7%

85-89

9%

90-94

11%

95+

14%

  • Adjustments are made if you start the pension during the year. For example, if you start a pension in January, only around half of the full year’s payment has to be made and the calculation will be done based on your balance in January (i.e. when you start the pension), not the previous 1 July. In fact, if your pension starts as late as June, you do not need to make a payment in that first financial year at all. 

  • You can stop (known as 'commuting') your pension at any time and return your benefit to a super accumulation account. You might do this if you no longer want to take so much income, for example, if you return to work. If you decide to do this, you have to pay your pension up-to-date first, for example, if you’re stopping your pension on 1 October, you would have to take roughly one quarter of the year’s minimum payments first.

  • The fact that you’ve started taking a pension doesn’t prevent you from also having lump sums paid from your account (sometimes there are tax benefits to doing this or you may want to draw out a particular asset in specie). If your pension is a TRP, there are some extra restrictions about lump sums. 

  • There are also restrictions around lump sums that are designed to make sure you still meet the minimum pension requirements. These are particularly relevant if you’re taking a very large payment as a lump sum and/or stopping the pension entirely.  

  • Starting a pension doesn’t prevent you from continuing to make contributions to the fund – these are just recorded separately in a new member account. You can’t simply add them to the pension once it is running. 

  • You can set your pension to continue to someone else (such as a spouse) when you die. This is known as a ‘reversionary’ pension. Note that you can generally only nominate your children to be your reversionary pensioner if they are minors, and even then, they have to cash out the pension when they reach age 25. 

  • Presuming all conditions are met, income generated from the proportion of the fund’s assets that support the pension is tax exempt.


Features of a transition to retirement pension

A Transition to Retirement Pension (TRP) allows you access to your super money without retiring. This means you can: 

  • remain in the workforce and reduce your hours of work as you approach retirement, or 

  • boost your retirement savings by putting more of your pre-tax salary into super and replacing the foregone salary with pension payments. This is generally referred to as ‘salary sacrificing’ and is often more tax effective than simply taking the full amount as salary. 

A TRP has the same rules as an account-based pension but with two three added requirements: 

  • you cannot take more than 10% of your account balance out as a pension payment in any given financial year. The same 10% limit applies regardless of when you start your TRP, even if you started it in mid-June, you’d still be allowed to take up to 10% of the full balance before the end of the financial year. 

  • you can only take lump sums if some of the money in your TRP is not classified as preserved. This might happen if you retired at some point in the past, then went back to work, added to your super and then started a pension. Your pension would be a TRP because it includes some preserved super (any increase after you went back to work). You could only take lump sums from the part that is not preserved. For most people with a TRP, the entire amount is preserved and therefore no lump sums are possible. 

  • the income generated from the assets supporting a TRP are taxed at the same rates as the fund’s accumulation balances.

As soon as you meet a condition of release that gives you full access to your super, such as retirement, these limitations will stop applying to your TRP and it will become just like a normal account-based pension.