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Self Managed Super Fund (SMSF) Article
2nd five steps to starting a pension

By Tony Negline.

This article may be out of date.

15th December 2004

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This is the second instalment in a two part article series that details the ten steps to begin a pension in a small super fund.

Last week we concluded with Step Five – the member accepts the trustee’s offer which you will recall is contained in a Product Disclosure Statement.  When the member accepts the trustee’s offer, the member should detail what dollar value of assets the member would like to use to begin the pension.

If this purchase price is coming from money that is not already in the fund, then the member must advise the trustee where these funds are coming from.  Are the proceeds coming from new contributions?  Will these contributions be subject to tax when received by the trustee?  Or will some or all of these proceeds be coming from super benefits rolled over or transferred from another super fund, an employment termination payment, or other similar type of benefit?

Who is initiating the rollover or transfer?  If it is to be initiated by the trustee, the trustee will need to authority from the member to request the rollover or transfer of funds from the other super vehicles.  The fund transferring the member’s account balance will demand to see proof from the receiving fund that the fund is a complying super fund and the trustees want the fund to retain this status.

Any special preservation rules that apply to the transferring payments also need to be taken into account.  Sometimes it can take the transferring fund sometime before they get around to sending the funds through.  This means that it may be some time before the amount received is known.  This is especially the case if the receiving fund has to pay upfront taxes on an amount transferred.

The member should also tell the trustee if the amount being deposited in the fund is coming from a pension that is already being paid from another super fund.  This is particularly important when the original pension was a complying pension for RBL purposes and it is necessary to begin a new pension which is also a complying pension for RBL purposes.

When the member tells the trustee what type of pension they would like, they may need to specify the level of income and any relevant characteristics.  For example, with an allocated pension the trustee should tell a member what minimum and maximum incomes are allowed from their income stream in the Product Disclosure Statement.  The member must then let the trustee know what actual income amount they want paid from the pension.

Investors thinking of using an allocated pension need to be aware that if they stick to the minimum income level their income will not keep pace with inflation.  They may need to ask their trustee to index their payments over a period of time (such as three, six or twelve months or even longer).

For Term Allocated Pensions the member will have to inform the trustee what initial term they would like to have.  The selection of this term is very important because it drives how much income is paid out of the pension.  In a Product Development Statement, the trustee should have told the trustee what their allowable terms are.

If the member wants the pension to continue to be paid to a specific person upon their death (called a reversionary pensioner) then the trustee must clearly specify who this person is, their date of birth and their relationship to the member.

The member must also tell the trustee what will happen to any remaining account balance if the member should die.  Will the trustee be bound by a binding nomination?  If so, what type?

A member should also complete a PAYG Declaration so that the trustee is able to withhold the right income tax from each pension payment.  (If the member doesn’t provide this declaration then a trustee would need to withhold 48.5% income tax from each pension payment.)

Step Six – Trustee to check with the member the precise details of the pension.

Once the precise details of the pension are known, including the purchase price, amount of income, etc, the trustee should send the member a detailed outline of the pension’s structure so that the member and the trustee have both confirmed what is about to be done.

Step Seven – The trustee should fully document the pension for its own records.

The trustee should have complete documentation of the pension’s full characteristics such as the commencement date, date of first pension payment, how often pension payments will be paid and how.

Step Eight – Trustee must make sure pension payments would be made on time

To make sure pension payments are actually made on time, it is handy for a trustee to set up a direct debit facility that transfers the net of income tax payments from their bank account to the member’s nominated bank account.

Step Nine – The pension commences

On this day the trustee should ensure that all relevant changes are made to the fund’s accounts.  As this is the day that all earnings on the assets backing a pension are tax-free, it is important that the members are able to clearly identify income or capital gains received by the fund from this commencement date onwards.

Step Ten – The trustee reports the pension to the Australian Taxation Office for Reasonable Benefit Limit purposes.

This requirement is very important, even in situations when the pension is made up of Eligible Termination Components that don’t count RBL purposes such as undeducted contributions.

The benefit must be reported to the ATO within first 14 days of the month following the month in which the pension commences.

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This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.

 
 
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