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Self Managed Super Fund (SMSF) Article
Taking the final steps to a tailor-made pension

By Tony Negline.

This article may be out of date.

17th November 2010

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Last week I wrote about some of the steps essential for paying a pension.  This week I complete this process by looking at the remaining procedures that hava to be addressed.

Paying a pension is a big decision for many investors because the pension is often the major source of retirement income.  If you're unsure about how to set up a pension you may be better off seeking expert advice.

Step Five

The member formally accepts the trustee's offer which is contained in the Product Disclosure Statement.  When the member does this they should also 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 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 into that fund.  The Tax Office has recently introduced new procedures for large funds so they can transfer money to SMSFs with confidence.

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 awhile before the pension's purchase price 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.

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 account based pension the trustee should tell a member what minimum income is required from their income stream in the Product Disclosure Statement.  For Transition to Retirement pensions the trustee will also have to nominate the maximum income.  If the member has been given the ability to nominate their level of income then they should tell the trustee what they want to receive.

Investors thinking of using an account based 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 at some regular interval (such as three, six or twelve months or even longer).

If the member wants the pension to continue to be paid to a specific person upon their death (called a reversionary pensioner) then they 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?  What does the trust deed permit?

If the member is under 60 when the pension commences then they should also complete a PAYG Declaration so that the trustee can withhold the right income tax from each pension payment.  (If the member doesn’t provide this declaration then a trustee would need to withhold 46.5% income tax from each pension payment.)

Step Six

The trustee must 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 occur.

Step Seven

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

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

Step Eight

The trustee must make sure pension payments are 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.

Obviously trustees will need to make sure that they always have sufficient cash to make the income payments.  Cash flow management becomes more important once a pension commences.

Step Nine

The pension commences.

On this day the trustee should ensure that all relevant changes are made to the fund’s financial 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.

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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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