Whether your retirement savings are held in an industry super fund, or a self-managed super fund (SMSF), a transition to retirement (TTR) strategy can be a helpful tool when moving from the accumulation phase to the pension phase of your super. The strategy helps by structuring beneficial income, taxation and superannuation arrangements during your final working years to prepare you (financially) for your long-awaited retirement.
No matter where your super is held, TTR strategies should only be implemented under the advice of a finance professional. This is especially important when your retirement savings are held in an SMSF as there will be additional administrative and taxation implications you’ll need to consider.
As with all aspects of SMSF management, every decision needs to be made in line with the trust deed and SMSF legislation. If you’re unsure about any of these requirements, it’s always best to seek expert advice
As the name suggests, this describes the period of time when contributions are being made to the fund.
The pension or retirement phase is when the member starts receiving payments from the SMSF.
There will come a point in time where you will stop actively contributing to your SMSF, and the accumulation phase switches to the pension phase. This is usually at retirement when you’ll start using your retirement savings for living expenses.
There are two types of pensions available in an SMSF. Each type has specific rules about when and how they can be used.
With all pensions coming from an SMSF, there are minimum amounts you need to draw each year to maintain tax free status of your fund’s earnings.
If there is more than one member in your SMSF, you may have a member in the accumulation phase while the other is transitioning to the pension phase. The good news is that you can certainly manage this type of arrangement as long as your SMSF trust deed allows it.
When a member’s benefit transfers to a pension, the amount supporting the proposed pension is treated separately to the remaining balance of the SMSF. Due to this, the value of the supporting balance will need to be calculated to determine the taxation position of the pension and give you a starting position to follow for various SMSF administrative and pension payment rules. You may also be required to provide an ‘accumulation phase value’ (APV) to the ATO in subsequent tax years.
An SMSF is still subject to the same super taxation rules as standard super funds and this may affect the way your pension component is valued or taxed. When paying a pension from an SMSF, the trustee must ensure that super pension standards are met.
In general terms, the accumulation phase usually attracts 15% tax whereas the pension phase is tax exempt. However, there may be additional factors to consider and it’s important to obtain appropriate financial and taxation advice when considering any changes to your retirement savings.
As the trustee, you are responsible for all decisions made on behalf of the SMSF and its members.
You’ll need to consider a number of factors when deciding to make payments to a member via an income stream.
The fund may be subject to significant penalties or there could be taxation implications for a member if funds are released incorrectly or in error.
A correctly structured pension from your self-managed super fund could be the perfect way to transition from work life and give you the confidence of knowing you can tackle all your dreams at retirement. An SMSF specialist can help you understand the rules and regulations and get you in the best position for retirement.
This blog has been prepared by RJS Wealth Management Pty. Ltd. ABN 24 156 207 126. RJS Wealth Management Pty. Ltd. is a Corporate Authorised Representative (No. 438158) of Modoras Pty. Ltd. ABN 86 068 034 908 an Australian Financial Services and Credit Licensee (Number 233209). The information and opinions contained in this blog is general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individual’s personal circumstances have been taken into consideration for the preparation of this material. Any individual making a decision to buy, sell or hold any particular financial product should make their own assessment taking into account their own particular circumstances. The information and opinions herein do not constitute any recommendation to purchase, sell or hold any particular financial product. Modoras Pty Ltd recommends that no financial product or financial service be acquired or disposed of or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this blog can change without notice. Modoras Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication.