SMSF pensions: How do I start one?

Q: How do you change your self-managed super fund (SMSF) from accumulation phase to pension phase (husband aged 60, and retired) and transition-to-retirement pension phase (myself aged 57 and still working part time)? If an accountant has to do it, what costs could be involved? Your site has been a great help in understanding things we didn’t know, thank you very much.

We are very pleased that you’re finding the site so helpful. For the benefit of other readers I’ll first explain the different phases, and the pensions that you are referring to in your question.

Background: The two key differences between accumulation phase and pension phase are:

• Earnings on fund assets during pension phase are exempt from tax. Earnings during accumulation phase are subject to 15% tax.
• Pension phase is subject to minimum pension payment rules, while accumulation phase has no payment restrictions (assuming the fund member has retired or satisfied another condition of release, such as turning 65).

Note that a super fund member cannot make contributions to a pension account. A separate accumulation account needs to be opened to accept member contributions, and such a strategy requires additional compliance and administration requirements.

Entering the pension phase

A member of a SMSF can choose only from two types of pensions – an account-based pension or a transition-to-retirement pension (what I call a ‘TRIP’). (If you retired before 20 September 2007 however, you may be receiving another type of pension from your SMSF.)

The two types of SMSF pensions available are:

• Account-based pension: An account-based pension gives you unlimited access to your account balance but how long your money lasts depends on the investment returns that your pension assets deliver. You also must withdraw a minimum amount each year, based on your age. I explain the minimum payments in the article What a relief! Minimum pension payments reduced by 25% for 2011/2012 and 2012/2013 years.
• Transition-to-retirement pension (TRIP): A TRIP is available to those who have reached preservation age (currently 55) but have not retired from the workforce. You run the TRIP in a similar way to running a regular account-based pension, but you cannot withdraw lump sums from a TRIP (that is, it is a non-commutable pension), and you can withdraw no more than 10% of the account balance each year in pension payments. I explain how TRIPs work in the article TRIPs: 10 interesting facts about transition-to-retirement pensions.

Converting a SMSF account from accumulation phase to pension phase involves quite a few steps, and depending on your motivation, it is possible to do these steps yourself. I list what I consider to be the main steps (14) in my book DIY Super For Dummies, 2^nd edition (Wiley), although anyone running a SMSF should conduct their own research and ensure any strategy fits in with their individual needs.

How much does an SMSF cost?

You ask how much an accountant/administrator will charge for setting up a pension. You will also need to find out how much the ongoing costs will be for running a fund in pension phase.

I cover the costs of running a SMSF in the SuperGuide article, SMSF: How much does a DIY super fund cost?, and in detail in my book DIY Super For Dummies, 2^nd edition but briefly here are some of the costs that you can expect for a SMSF in pension phase:

• Starting a pension: between $440 and $880, depending on service provider and package. I’m aware of one service provider that does it for free, subject to you signing over the administration of the SMSF as well. The administration fee is also very cheap for this provider so I assume most of the service is automated rather than personalised. I understand that you must use a certain bank, and a certain broker for your fund, and the administrator receives commissions from those two financial organisations for locking in clients.
• Trust deed update (if the deed doesn’t currently allow TRIPs or account-based pensions): updates can cost from $110, but major updates can cost from $550 to $770.
• Actuarial certificates (if you plan to make super contributions while taking a pension): between $330 and $550.
• DIY super package deal: Many service providers offer package deals that include starting the pension, and the ongoing administration of your fund. If you do some research to ensure that you’re clear about what you need for your fund, you may get a good deal especially as a new client.

Tip: You can also check out the SuperGuide Directory listing more than 350 service providers, and which may give you an insight into what services are available, and at what costs. Alternatively, using any internet search engine such as ‘Google’, ‘Yahoo’ or ‘Bing’ type in  ‘SMSF administration’ and check out the services offered by the different administrators, to get a sense of what’s involved. Some of the websites list what is involved in setting up a SMSF pension and also provide lists for other compliance issues as well. The majority of providers simply describe the service they offer, and indicate the fee.