Main points to consider regarding an account based pension:
- You must have satisfied a condition of release in order to start an account based pension.
- The most common condition of release is to have reached preservation age and fully retired.
- The income earned by your superannuation fund when in pension phase is tax free.
- If you are over 60, the pension received is tax free income.
- If you are under 60, the taxable portion of the pension is taxable income, however you are eligible for an offset of 15% of the taxable portion which reduces the tax payable.
- The 15% offset is a non-refundable offset.
- The trustee is required to prepare minutes to commence the pension.
Further issues to consider:
- Most of the time when a SMSF first starts a pension, there will be a time when there is both an accumulation account and a pension account at the same time. In this situation, there are 2 options for managing the breakdown between the tax free pension portion and the taxable (15% tax rate) accumulation portion.
- Segregated assets – Using this method, the SMSF’s assets will need to be divided into either accumulation or pension assets and kept completely separate from each other. Each account would need its own bank account, any shares would need to be owned on separate investor accounts. As this method involves considerable amount of management and time, it is less popular.
- Actuarial/unsegregated – This method is more popular, as it is much easier from a management stand point. All assets can remain together however each year an actuarial certificate will need to be purchased, costing around $300. However this may be significantly cheaper than the additional compliance work required to create the reports of a segregated assets fund.