Are you running an SMSF and starting to think about retirement? We’ve got some information here that can help you make the jump from accumulation phase to transition phase.
This article is published by Modoras Pty Ltd ABN 86 068 034 908
Transition to Retirement: How to move from accumulation phase to pension phase in your SMSF
Whether your retirement savings are held in an industry super fund, or a self-managed super fund (SMSF), a transition to retirement (TTR) strategy can be a helpful tool when moving from the accumulation phase to the pension phase of your super. The strategy helps by structuring beneficial income, taxation and superannuation arrangements during your final working years to prepare you (financially) for your long-awaited retirement.
No matter where your super is held, TTR strategies should only be implemented under the advice of a finance professional. This is especially important when your retirement savings are held in an SMSF as there will be additional administrative and taxation implications you’ll need to consider.
As with all aspects of SMSF management, every decision needs to be made in line with the trust deed and SMSF legislation. If you’re unsure about any of these requirements, it’s always best to seek expert advice
What’s the difference between the accumulation phase and the pension phase?
As the name suggests, this describes the period of time when contributions are being made to the fund.
- Super balance increases
- Longest phase (starts when contributions start)
- Contributions made by an employer or member
- This phase is usually while a member is working
- Can still continue even if you reach your retirement age or preservation age
The pension or retirement phase is when the member starts receiving payments from the SMSF.
- Super balance decreases
- Withdrawal rules apply
- Super is progressively drawn down
- You must meet the conditions of release to access your superannuation
- Transition to retirement income stream (TRIS) or Simple account-based pension (SABP)
- Transfer balance cap may need to be considered
There will come a point in time where you will stop actively contributing to your SMSF, and the accumulation phase switches to the pension phase. This is usually at retirement when you’ll start using your retirement savings for living expenses.
What pensions are available in an SMSF?
There are two types of pensions available in an SMSF. Each type has specific rules about when and how they can be used.
SABP – Simple Account Based Pension
- Available when you reach age 65 or anytime after your preservation age if you have retired
- No maximum withdrawal limits
- Earnings from assets are tax exempt
TRIS – Transition to Retirement Income Stream
- Allows you to access super once you reach your applicable preservation age
- Available if you haven’t retired
- Minimum drawdown amounts apply, and withdrawals are capped at 10%
- Subject to transfer balance cap rules
- There may be taxation implications if accessed under age 60
With all pensions coming from an SMSF, there are minimum amounts you need to draw each year to maintain tax free status of your fund’s earnings.
How does a pension work in an SMSF with multiple members?
If there is more than one member in your SMSF, you may have a member in the accumulation phase while the other is transitioning to the pension phase. The good news is that you can certainly manage this type of arrangement as long as your SMSF trust deed allows it.
When a member’s benefit transfers to a pension, the amount supporting the proposed pension is treated separately to the remaining balance of the SMSF. Due to this, the value of the supporting balance will need to be calculated to determine the taxation position of the pension and give you a starting position to follow for various SMSF administrative and pension payment rules. You may also be required to provide an ‘accumulation phase value’ (APV) to the ATO in subsequent tax years.
Tax implications when transitioning from accumulation to pension phase
An SMSF is still subject to the same super taxation rules as standard super funds and this may affect the way your pension component is valued or taxed. When paying a pension from an SMSF, the trustee must ensure that super pension standards are met.
In general terms, the accumulation phase usually attracts 15% tax whereas the pension phase is tax exempt. However, there may be additional factors to consider and it’s important to obtain appropriate financial and taxation advice when considering any changes to your retirement savings.
Trustee considerations when an SMSF moves to the pension phase
As the trustee, you are responsible for all decisions made on behalf of the SMSF and its members.
You’ll need to consider a number of factors when deciding to make payments to a member via an income stream.
- Conditions of release
- Preservation age
- Cashing restrictions
The fund may be subject to significant penalties or there could be taxation implications for a member if funds are released incorrectly or in error.
Stop! Read this before making any decisions about SMSF pensions
- Review the SMSF trust deed: Ensure that any decisions are made in line with both the super rules and the rules of your SMSF. A review could be timely even if you don’t have a member approaching retirement age, so you can make any changes (if required) to the trust deed.
- Review your SMSF investment strategy: The strategy you use during the accumulation phase may not be appropriate as you move into the pension phase. Objectives change depending on your life stage and this means your strategy may need to be adjusted as well.
- Consider timing of returns: Negative returns can have a greater impact around the time you make these changes as it is usually the time when your balance is at its highest. You can read more about sequencing risk here.
- Estate Planning: You should review your estate planning to make a decision on what will happen with your pension, or retirement savings after your death.
- Meeting Pension Standards: There are pension standards outlined in the superannuation act and these will need to be upheld for the duration of the pension payment.
Seek help to get in the best position for retirement
A correctly structured pension from your self-managed super fund could be the perfect way to transition from work life and give you the confidence of knowing you can tackle all your dreams at retirement. An SMSF specialist can help you understand the rules and regulations and get you in the best position for retirement.
A Modoras Financial Planner can assist with transition to retirement strategies and make sure you’re ready to change from accumulation phase to pension phase at the right time. Call us on 1300 888 803 to chat about your options.
IMPORTANT INFORMATION: This blog has been prepared by Modoras Pty. Ltd. ABN 86 068 034 908 an Australian Financial Services and Credit Licences (Number 233209). The information and opinions contained in this presentation is general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individual's personal circumstances have been taken into consideration for the preparation of this material. Any individual making any investment or borrowing decisions should make their own assessment taking into account their own particular circumstances. The information and opinions herein do not constitute any recommendation to borrow funds or purchase, sell or hold any particular investment. Modoras Pty Ltd recommends that no financial product or financial service be acquired or disposed of, credit contract entered into or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this blog may change without notice. Modoras Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication.
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