In this edition of Ask Colley, Graeme Colley answers “What are the different types of pension strategies I can consider for my SMSF?”.
Q: What are the different types of pension strategies I can consider for my SMSF?
A: I sometimes think about when I’ll retire…will it be next month, next year or later than that? Who knows, but the longer you work, the better it is for your retirement savings. When the day does come, I’ll be thinking about how I’ll draw my SMSF down.
Will it be as a lump sum, pension or a bit of both?
As a member of an SMSF, there are two types of pensions I can commence – an account based pension and a transition to retirement income stream (TRIS). If I was thinking of starting one or the other the most important thing is understanding preservation age or whether I’m considered retired under the super rules. That’s probably the first strategy – planning when you will receive your pension.
Preservation age is the time you can access your super as a TRIS even though you continue to work full or part-time. Preservation age at the moment is 57 but increases to age 60 depending on birth date. You are treated as being retired once you’ve reached preservation age and you have stopped work but don’t intend to go back to work for more than 10 hours each week. Once you are 60 or older all you need to do is stop working in one job and you are treated as retired. When you are 65 or older you can drawdown your super no matter whether you’re working or not.
TRISs can come in very handy from a cash flow point of view as they can start once you are 57 and continue to work. These days, it means you can receive a TRIS and at the same time get a tax deduction for super contributions. The benefit is that the taxed part of the TRIS is eligible for a tax offset of 15% and you get a tax deduction for super contributions at your personal tax rate. You must take a minimum TRIS of 4% of the account balance each financial year and no more than 10% of the balance.
That’s the second strategy – thinking about the benefits of TRIS if you qualify.
Once you’re treated as retired you can start an account based pension. You will be required to take a minimum amount each year depending on your age, but you can decide when to take it. It could be weekly, monthly or even once each financial year, but that’s up to you. Once you are 60 or older the account based pension is totally tax free when you receive it. Between preservation age and 60 the pension is taxed at your personal rates, but you get a 15% tax offset to reduce your tax bill.
Another benefit is that the income the fund earns on investments used to pay the account-based pension is tax free – a real bonus. However, there are limits on the amount you can transfer into pension phase to commence an account based pension which is $1.6 million. That’s strategy number three – starting an account based pension, achieving tax-free income both in the super fund and after you reach 60.
One day you will drop off this mortal coil and may wish that your loved ones benefit from what’s left over from your super. If you’ve been drawing down a TRIS or an account-based pension, then there are two or three options on how it gets passed on.
The first is to make the pension reversionary, second is making a binding death benefit nomination and lastly is relying on your fund’s trust deed.
If you make your TRIS or account based pension reversionary it means whatever is left over on your death will go automatically to your surviving partner, any of your children under 18 or other dependants, whoever you nominate. The alternative is to have a binding death benefit nomination which directs the trustee to pay the pension to your dependants including your surviving partner or children. If you don’t have either a reversionary pension or a binding death benefit nomination, then the trustee of your fund can distribute your super as permitted by the fund’s trust deed. That’s a fourth strategy – planning for your estate and who will benefit.
So for SMSFs, the considerations encompass what type of pension to start, when to start it and what happens to anything that’s left over should you pass away. Then the ultimate question is, how much do I need for my retirement?
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