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Self Managed Super Fund (SMSF) Article
1st five steps to starting a pension
By Tony Negline.
This article may be out of date.
8th December 2004
This is the first two articles that give you the ten steps to begin a pension in a small super fund.
Step One – A trustee must deal with everyone, including fund members, at arm’s length. This might seem like a silly rule which only creates paper-work that adds no value at all. The best aspect of this rule is that it helps trustees of Self Managed Super Funds to put their own personal member issues to one side and act as a trustee.
Step Two – Check a fund’s trust deed. When a super fund begins paying a pension, it is a good idea to completely review the fund’s trust deed. Many deed provisions will influence what type of pension can be paid, when those pensions can be paid, how those pensions are to be structured, operated and administered and what type of member can be paid the allowed pensions.
Step Three – Why is the pension being paid? Broadly there are two possible reasons.
Firstly, a fund’s member has requested the trustee use their assets to pay a pension. If this occurs then depending on their age the trustee should prepare documentation to show that the member’s Preserved Benefits and Restricted Non-Preserved Benefits can be paid.
If a member is aged less than 65 and ceased gainful employment (that is, doing a material mental or physical activity and receiving a tangible benefit for the work) before reaching age 60 then it is important for a trustee to have documentation that the employment ceased. For members in this age bracket, trustees should also document that they are reasonably satisfied that the member never again intends to be gainfully employed for more than 10 hours per week.
If a member is aged less than 65 and ceased, or radically changed the nature of their, gainful employment after 60 years of age then a trustee only needs to confirm these events.
Secondly the member is aged over sixty-five and does not satisfy the continuing work test. When this occurs the fund must pay the members super assets out either as one or more lump sums or as one or more pensions.
Members must now be able to demonstrate that they were gainfully employed on a part-time equivalent level. This means at least 240 hours of gainful employment in the previous financial year. Super fund trustees are required to make “reasonable attempts to keep itself informed about a member’s ongoing employment status”.
The rules state that if a member’s part-time gainful employment status cannot be verified then a trustee must assume that the member is not gainfully employed. This means the benefit must be paid out.
Step Four – Prepare a Product Disclosure Statement.
According to the Australian Securities and Investments Commission, a PDS is meant to help “consumers compare and make informed choices about financial products.”
A trustee must provide a PDS to members who are beginning a pension. This is the case even for super funds which are old.
The Corporations Act and its regulations provide all the rules which drive what should be in a PDS. ASIC has also issued guidelines which assist financial product issuers work out what should and should not go into a PDS.
Most SMSF trustees won’t have time to go through the legislation and other documentation. Fortunately some legal firms have created generic PDS’ which can be amended for specific circumstances.
Before a trustee completes a PDS, they may need to use the services of other professionals. For example a trustee may need to value the assets of the fund to work out the market value of fund assets. This will help a trustee provide accurate information to a member. The member can then work out what suits their own circumstances.
If the pension is a defined benefit pension (for example payable for the life of the member and any reversionary), the trustee may need to use the services of an actuary to work out what level of income and income indexation options are acceptable.
A PDS must specify all the details of the pension the trustee proposes to pay to the member. The PDS should also tell the member what information the trustee needs to begin a pension. (Ideally this information should be detailed on an application form which the member can complete.)
The following information is necessary to begin a pension: commencement date (this is official start date of the pension; on this date the assets backing the pension begin to be taxed at 0%); the date of first payment (this date is self-explanatory; generally this date is not the same as the commencement date); specific pension product characteristics (such as the amount of money to be used to buy the pension; the first years’ pension income, number of pension payments per year, death benefit options, etc); the trustee may want a member to detail what assets should be sold to make pension payments.
Step Five – Member formally accepts the trustee’s offer in writing
Next week – Steps Six – Ten.
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