A SMSF transition to retirement pension is a strategy that is very easy to implement and can provide great outcomes. However, there are a few things to be mindful of first. Let’s take a look at how a SMSF transition to retirement works and the rules associated.
How Does a SMSF Transition to Retirement Income Stream Work?
A SMSF transition to retirement income stream can be started by you, as a member of a SMSF, once you have reached your superannuation preservation age.
There are a number of reasons why you might choose to start a transition to retirement pension. For example, you may decide to reduce your working hours and need some of your superannuation to supplement your reduced income. You might want additional income to pay down debt faster, or cover an upcoming expense. Or, you might be thinking of using a transition to retirement pension to implement a transition to retirement strategy.
Whatever the case, if you plan on starting a transition to retirement (TTR) income stream, you first need to understand the transition to retirement rules. This is particularly important when you have a self managed superannuation fund (SMSF), because unlike retail and industry superannuation funds that have a professional trustee; it is you who is the trustee of your SMSF. Therefore, you are legally responsible for the activities of the SMSF and ensuring compliance with superannuation rules, legislation and regulations.
SMSF Transition to Retirement Rules
The SMSF transition to retirement rules allow you to start a transition to retirement income stream once you have attained your preservation age, which can be found in the table below:
| Date of Birth | Preservation Age |
|---|---|
| Before 1 July 1960 | 55 |
| 1 July 1960 – 30 June 1961 | 56 |
| 1 July 1961 – 30 June 1962 | 57 |
| 1 July 1962 – 30 June 1963 | 58 |
| 1 July 1963 – 30 June 1964 | 59 |
| After 30 June 1964 | 60 |
Once you have reached your preservation age, you can use some or all of your SMSF accumulation balance to start a TTR pension.
Your employment status is irrelevant when determining your TTR pension eligibility. Only your age is important. However, you might consider how any recent changes to your employment status, or attaining age 65, might make you eligible for an account-based pension (which is more favourable than a TTR pension).
Learn more about Account-Based Pensions
Should you start a SMSF TTR pension you, in your capacity as a member, will be able to receive an income of between the minimum and maximum withdrawal thresholds of 4% and 10% of your account balance.
Then in your capacity as a trustee of the SMSF, you are responsible for ensuring that an income of at least 4% of the TTR balance is paid during the financial year, and no more than 10%.
Related Article: Can I Make a Lump Sum Withdrawal from My TTR Pension?
What is the SMSF Transition to Retirement Tax Rate?
The SMSF transition to retirement tax rate on investment earnings derived from assets within the SMSF is the same as the accumulation phase super earnings tax rate. That is, 15% on all income and capital gains, reducing to 10% on capital gains if the asset sold was owned for longer than 12 months.
The tax rate on SMSF transition to retirement pension payments received into your personal bank account will depend on whether you are below age 60, or aged 60 and over. If you are aged 60 and over, TTR pension payments will be received tax-free. If you are under age 60, some or all of your pension payments may be taxable. Learn more about Transition to Retirement Tax
When Can an SMSF Go into Pension Phase?
A SMSF can go into pension phase when a member has satisfied a condition of release with no cashing restrictions, such as meeting the superannuation definition of retirement, or attaining age 65.
A TTR Pension is not considered pension phase, because it does not receive tax-free status on investment earnings.
Read More About: Superannuation Conditions of Release
Only the members who have met a full condition of releases can have their specific member balances move into the pension phase. It is possible, and not uncommon, for a SMSF to have members in both accumulation phase and pension phase at any given time. Or, for one member to have funds in the accumulation phase and pension phase.
What is the Tax Rate of an SMSF in Pension Phase?
The tax rate of an SMSF in pension phase is 0%. Specifically, all investment earnings, such as interest, dividends, distributions, rent and realised capital gains are received completely tax free.
Sometimes a SMSF will not be wholly in pension phase or wholly in accumulation/TTR pension phase. In this instance, the tax rate will be based on whether the SMSF runs a pooled investment strategy or a segregated investment strategy.
If a SMSF runs a pooled investment strategy, then the tax-free status on investment earnings will be based on the portion of the SMSF that is in pension phase.
If a SMSF runs a segregated investment strategy separated by accumulation and pension phases, then the assets supporting members in pension phase will receive tax-free investment earnings and the assets supporting members in accumulation phase will incur tax of up to 15%.
Pension payments received by members in pension phase (or transition to retirement phase for that matter) will generally be received tax-free when aged 60 or over, but may incur tax if under age 60.
Should I Start a Transition to Retirement Pension?
If you are between age 60 and 65, a transition to retirement pension can be a very valuable strategy for a number of reasons. But, whether or not you should commence one can only be determined by the specifics of your situation.
Our financial planning firm, Toro Wealth, specialises solely in helping 50 to 70 year-olds optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.
This video shows you how a transition to retirement strategy can reduce your personal income tax and increase your super.
Frequently Asked Questions
Listed below are some frequently asked questions.
Can I Sell My SMSF Property When I Retire?
Yes, you can sell your SMSF property when you retire. In fact, you can sell your SMSF property whenever you like.
A property is just another investment within your SMSF and there is generally no restriction on when you can sell assets within your SMSF. However, before you do, you should be mindful of the implications associated with selling a property, such as capital gains tax, repayment of debt, sale costs and how you plan on allocating the proceeds.
Can I Withdraw a Lump Sum from a SMSF After Age 65?
Yes, you can withdraw a lump sum from a SMSF after age 65 because age 65 is classified as a full superannuation condition of release, which means you have unrestricted access to your superannuation member balance.
Articles You Might Also Like:
- SMSF Investment Strategy: Your Complete Guide
- How Much Does It Cost to Set Up a SMSF?
- What Is a Self Managed Super Fund (SMSF)?
Sources
- Administering and reporting 2020, Ato.gov.au, viewed 21 August 2023, <https://www.ato.gov.au/super/self-managed-super-funds/administering-and-reporting/>.
- SUPERANNUATION INDUSTRY (SUPERVISION) REGULATIONS 1994 – REG 1.06 Meaning of pension (Act, s 10) 2015, Austlii.edu.au, viewed 21 August 2023, <http://classic.austlii.edu.au/au/legis/cth/consol_reg/sir1994582/s1.06.html>.
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