SMSF pension: Can I still make super contributions?

Q: I am 62 years of age and retired. I have recently commenced an account-based pension from my SMSF. Can I still make non-concessional contributions to that fund?

A: I have divided your question into two parts.

1. 1.     Can someone who is 62 years of age and retired, continue to make super contributions?
2. 2.     Can an individual who has started a SMSF pension, make super contributions to that SMSF?

1. Can someone who is 62 years of age and retired, continue to make super contributions?

You can make concessional contributions (subject to eligibility) and/or non-concessional contributions to a super fund until the age of 74. You need to be mindful of the following requirements:

• If an individual is aged 65 or over, then they must satisfy a work test to be able to make super contributions. The work test involves the following: you must be gainfully employed for at least 40 hours in a consecutive 30-day period in the financial year in which you make the super contribution.
• Anyone aged 64 or under can continue making super contributions to a super fund, even when retired, without having to satisfy a work test.

2. Can an individual who has started a SMSF pension, make super contributions to that SMSF

The short answer is ‘yes’. If a self-managed super fund (SMSF) member is in pension mode, then an accumulation account MUST be opened to accept super contributions. A pension account cannot accept super contributions.

Important: If you receive a pension from your SMSF, and you also want to open an accumulation account, then you must decide whether to segregate the assets financing the SMSF pension, from the assets representing your SMSF accumulation account. Earnings from assets that are financing a SMSF pension are exempt from tax, which means the ATO wants to ensure that only those assets financing such a pension (rather than other fund assets) receive tax exempt status. If you don’t segregate your pension assets from your other fund assets, then your fund must obtain an actuarial certificate for each year. The actuarial certificate is produced by an actuary and identifies the percentage of earnings that relate to tax-exempt income financing the SMSF pension.

Background: Your SMSF can have two distinct phases — accumulation phase and pension phase — that can operate concurrently or at separate times. When you’re contributing to a super fund, those contributions are recorded in your member account and then invested in assets. In these circumstances, your member account is in accumulation phase. You may choose to make regular contributions to your accumulation account, or you can also have your account in accumulation phase even when you’re not making super contributions. I usually describe the accumulation phase as: “When you’re not taking a pension from a super account.” When you are withdrawing a pension (also known as an income stream) from a member account, then that account is in ‘pension phase’.

The key difference between the accumulation phase and the pension phase is the tax treatment of fund earnings. In pension phase, fund earnings on assets, including any capital gains that your fund receives on the sale of pension assets, are exempt from tax. In contrast, earnings on assets in accumulation phase are subject to 15% earnings tax, although capital gains may receive a 33% tax discount (an effective tax rate of 10% on capital gains). If you choose not to draw a pension from your SMSF and leave your super benefit in accumulation phase indefinitely, then the 15% earning tax will also apply indefinitely.