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 three parts.
- Can someone who is 62 years of age and retired, continue to make super contributions?
- Can an individual who has started an SMSF pension, make super contributions to that SMSF?
- How are the super contributions taxed, compared with the pension account?
1. Can someone who is 62 years of age and retired, continue to make super contributions?
You can make voluntary concessional contributions (subject to eligibility) and/or non-concessional contributions to a super fund until the age of 74 (or, strictly speaking, after 75 but only if the contribution is recorded by your fund within 28 days after the month that you turned 75).
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. For more information on the over-65s work test, see SuperGuide article Over-65s work test: How does it operate?
- Anyone aged 64 or under, can continue making super contributions to a super fund, even when retired, without having to satisfy a work test.
Note: If you’re eligible, your employer must continue making compulsory superannuation contributions (Superannuation Guarantee) beyond the age of 75. For more information on SG requirements, see SuperGuide article Super contributions beyond the age of 75.
2. Can an individual who has started an SMSF pension, make super contributions to that SMSF
The short answer is ‘yes’. If a self-managed super fund (SMSF) member is in retirement phase, for an SMSF to be able to accept super contributions, then a separate accumulation account MUST be opened (or remain open) within the SMSF to accept those super contributions. A retirement phase account cannot accept super contributions.
Background: Your SMSF can have two distinct phases — accumulation phase and retirement 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’, although the more technical term now is ‘retirement phase’ (and indicates the earnings on pension assets are tax exempt).
Note: A super account cannot be both in accumulation phase and retirement phase, but you can have 2 super accounts within a SMSF, one in accumulation phase and the other in pension phase. You can have more than one super account in retirement phase within a SMSF, although you can only have one super account in accumulation phase.
3. How are the super contributions taxed, compared with the pension account?
The key difference between the accumulation phase and the retirement phase is the tax treatment of fund earnings. In retirement 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 retirement phase pension from your SMSF and leave your super benefit in accumulation phase indefinitely, then the 15% earning tax will also apply indefinitely.
SUPER ALERT! Since 1 July 2017, the earnings on assets financing a transition-to-retirement pension (TRIP) are no longer be exempt from tax (see SuperGuide article Less tax, more super? A transition-to-retirement pension is no longer the answer). Also, since 1 July 2017, Australians can transfer no more than $1.6 million into retirement phase (see SuperGuide article Retirement phase: A super guide to the $1.6 million transfer balance cap). Earnings on fund assets in retirement phase are exempt from tax.
Note: Tax-exempt pension earnings are a different concept from tax-free super benefits paid from a super fund on or after the age of 60. Tax-free super benefit payments for over-60s is separate and in addition to tax-exempt pension earnings. Individuals under the age of 60 who are receiving a super pension in retirement phase will still be able to enjoy tax-exempt earnings on pension assets, but the taxable component of any super benefits paid from that super account will be subject to benefits tax. For more information on tax and super, see SuperGuide article Super for beginners, part 15: Super tax – as easy as 1-2-3.
Important: If you receive a super 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 earnings on 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. Note that since 1 July 2017, there are stricter requirements on segregated assets.