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Self Managed Super Fund (SMSF) Article
How to pay yourself a pension now that you're retiring
By Tony Negline.
This article may be out of date.
10th November 2010
This week I begin a series of two articles that gives you the ten steps to begin a pension in a Self Managed Super Fund.
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 SMSFs put their own personal member issues to one side and act as a trustee.
Check your fund’s trust deed. Before 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 pension income can be paid, how those pensions are to be structured, operated and administered and what type of member can be paid a pension. It's often ill-advisable to rely on general compliance or catch all clauses.
Why is the pension being paid? Broadly there are four 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 to show that the gainful 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.
For those people who are aged at least 60 and ceased gainful employment after age 60 then a "gainful employment arrangement must have come to an end" and the trustee must be satisfied that the member never again intends to be gainfully employed for more than 10 hours per week. The trustee needs to document the ending of the gainful employment relationship.
Secondly the member is aged over sixty-five and the fund's governing rules demand that a pension be paid or the member is permitted to request that one be paid. However it needs to be pointed out that it is no longer necessary but a super fund trust deed demand this.
If any of these occur the fund must pay the member's super assets out either as one or more lump sums or as one or more pensions.
Thirdly the member has requested a Transition to Retirement pension. That is the member is over their preservation age (for people born before July 1960 this is age 55) and has not satisfied a preservation condition of release. In most situations this means the person will be under 65 and not permanently retired.
The trustee must 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.
There are formal detailed rules that detail 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.
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.
The member formally accepts the trustee's offer contained in the Product Disclosure Statement. I'll discuss this step in greater detail next week.
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.