Question 1

Can I make super contributions after commencing a pension?

Accepted Answer

https://youtu.be/exe6fCpG_9o

Q: I’m 70 years of age, retired and currently receiving a pension from my self-managed super fund. I would like to add additional money, non-concessional, to my superannuation. Am I able to do it? And what are the steps to carry out this task?

A: First of all, super contributions currently can be made up and till the age of 75. So, once we turn 75, we’re restricted from making any further superannuation contribution. As you’re 70, you will meet the age test to make contributions.

Then we look at the two types of contributions which can be made, which are your non-concessional, your after-tax contributions. Now, you don’t need to meet any work tests to make those contributions. You can make non-concessional contributions up to age 75 without the need to work. But you do need to have a total super balance below $1.9 million or no more than $1. 9 million on the last 30th of June.

Now, I know you didn’t ask about concessional, but just for completeness, there is a work test to make concessional contributions if you’ve already turned age 67. If you’re between ages 67 to 75 and you want to claim a tax deduction for contributions, then you need to meet the 40 hours work over 30 consecutive day work test.

In your question, though, you mentioned that you’re retired and currently taking a pension from the fund, and you’re looking at some admin steps or admin requirements. So first of all, remember that once you’ve started your pension, which you have, you can’t add any further capital to an existing pension.

If you want to make those non-concessional contributions, you need to make those contributions to your accumulation account within your SMSF. So your current pension will continue. It’s a separate account, a separate member interest, and you’re going to make your contributions into your accumulation account. If you’re eligible, which you are, because you’re age 70, you then need to work out what you are to do with those amounts in accumulation. You could, for instance, just leave that contribution in the accumulation account and it will grow. It’ll be in accumulation phase. Earnings will be taxed at 15 %. And so on.

You could instead decide to start a new second pension. So you’d leave your existing pension that you had running and you’re starting a second pension. Now, because once that second pension was made up or started after you made your non-concessional contribution, that’s always going to be 100% tax-free pension. What I mean by that is the tax components that make up that pension will be the tax-free component. It can pass to anyone tax-free. It’s sometimes good to keep those pensions separate.

Or the third option is you could commute or stop/cease your existing pension, and then once that money is rolled back to your accumulation phase, you could just start one new, larger pension with all of your balance. So you’d only have the one pension running. And what’s right for you would be dictated by your own personal circumstances. So you can contribute, but to your accumulation account, and then just work out what you want to do with those amounts.

I would also encourage you to check your SMSF trust deed. And what I’m suggesting you look for are any fund specific rules or requirements or restrictions around the acceptance of contributions to start off with. Those rules that I took you through before, that’s what the legislation talks about, non-concessional contributions up to 75, no work test. But just check to see what your trust deed says. It might not have been updated regularly, and it might be that you are limited around the types of contributions that can be accepted. Also, have a look at the rules around establishing a new pension if that’s what you want to do. You want to get these things right from the start.

So it’s important that you check your trust deed around that. There’s a good article on our website around some tips to manage those super changes around contributions.

Question 2

Do I have to take my SMSF pension as regular payments?

Accepted Answer

https://www.youtube.com/watch?v=9R2a5JKilm8

Q: I have an SMSF fully in pension phase. I am aged 70. I need to withdraw a minimum of 5%. I would have preferred to take this as a lump sum towards the end of each financial year, but my new accountant says I should take it as a regular payment spread out over the financial year. She said the ATO prefers this. I had been under the understanding that for the withdrawal you had a choice, either a lump sum or a regular pension payment. Is there a choice in my situation and if so, what are the pros and cons between each option?

A: In order for a pension to exist, in other words, in order for us to get all the tax benefits to go with a pension, not only do we need to establish it correctly, we need to also make sure that the ongoing pension standards or the ongoing pension rules are met each and every year. These pension standards are contained within the legislation, so they’re hardwired in there, and they must be met, each and every year.

There are five key standards and one of them is that there’s a minimum annual pension payment. We have to make sure that they’re met. Now, those standards, don’t have any or required pension frequency. They just require us to pay the annual minimum amount each year. There’s an annual amount, and it’s going to be paid each year.

There’s nothing that says we monthly, fortnightly, monthly, etc. If we go one step further and look at what the ATO says on this particular issue, they say that a superannuation stream or income stream of pension exists when all of the following apply, – that you’re entitled to a series of payments with each payment relating to each other, the payments are periodic (whether paid annually or more frequently), they’re made over an identical period of time and they meet the standards.

So, you’ll see here, the ATO is quite clear, in fact, that an annual pension payment is allowed. However, be careful here because the caveat is that the requirement or the liability to pay a single payment for one year isn’t a series of payments. So, if I decided to start a pension this year, I make an annual payment and that’s it, and I don’t make any more next year, the year after, it’d be very difficult to say that there was a series of payments. So just be careful. But to answer the question specifically, nothing at all in the legislation or by the regulator requires a frequency of more than one payment per year.

So, if we look at the pros and cons of doing it each way, and you’ll see there that I don’t have a cons column, a negative column for regular pension payments because it’s tied up in all the other boxes anyway.

Annual Pension Payment: ProsAnnual Pension Payment: ConsRegular Pension Payments: ProsMaintain higher fund & pension balance throughout the year if pension is paid at EOFYMay create a liquidity issue when a large annual payment needs to be madeCould allow better management of cash flow, for both the member and the SMSFMay reduce the need to hold large cash reserves if this is not in line with the fund’s investment strategyMarket timing: What if there is a downturn at the time you need to make a large withdrawal?Market movements may have less of an effect on drawdownsMay allow investments to be held longer throughout the year (TDs etc.)Miss the payment and you can’t catch upSystematic approach & regular payments; reduced risk of failing the standards

If we look at annual pension payments, what are the benefits or what could be perceived as the benefits for an annual pension payment? If we only make one payment at the end of the year, we’re maintaining a higher pension balance throughout the year. We’ve got all our pension balance in the fund for the whole period, and then we just take out that larger amount in June. By doing that, we’ve got a higher pension balance. We get higher pension earnings, which we know are exempt. We know they can form part of a taxable or tax-free component. There can be some benefits by allowing higher earnings on a higher balance, something to consider. It could also reduce the need to have larger cash reserves on hand to make the weekly or fortnightly or monthly payments. If you’re only paying an annual amount, you may not need to hold such high levels of cash reserves. But is that in line with your fund’s investment strategy? Consider that, of course, as well.

It could allow certain investments in the fund to be held longer. It could be that if you have term deposits in your SMSF, you might be able to get a longer term with your SMSF term deposit. You don’t need to get access to the interest to make those pension payments. So, they’re just a few of the pros that I came up with.

Some of the negatives, though, it can create a liquidity issue if at the end of the year, you need to take out a large lump sum. Now, it could be $40,000 or $50,000, $100,000 or $200,000 you need to take out as a lump sum at the end of the year, which means you need to have that liquidity on hand at that time. Of course, you could plan for it, but it’s a big chunk of liquid cash to come out.

The second con is around market timing, and this is really an important one and will differ for every SMSF. And what I’m getting at here is what if there’s a downturn in the market at the time you need to make that large withdrawal. So, let’s just say that I have my money in shares, and I plan on selling shares in June to fund my pension payment, but there’s a massive drop in the ASX just at that time. So, I’m selling assets at the worst possible time to make those pension payments. So again, market timing can be an issue for large payments. If it’s a cash asset, that may not necessarily be the case, but then you’ve got to think about tying up cash for that period of time.

The last negative here, which is one I don’t want you to overlook, is what if you forget to make that June payment, that annual pension payment? If you forget it, you’ve missed out. Like, come July, it’s a new financial year. You haven’t met the minimum, and all of a sudden, you’ve now got a massive tax issue because the fund is no longer deemed to have been in pension phase, and you have to pay tax on the earnings. If you are making regular payments monthly or buy them every two months or every six months, if you miss a payment, you still got that ability to make a catch-up payment in the current financial year. If you’re paying annual and you miss that one annual payment, you’ve lost that, and it can have some pretty significant outcome. So some pros and cons there.

Look, why people like regular pension payments and maybe why your accountant and your advisor, your administrator suggests or recommends that is for better management of cash flow for both the fund and the individual. You know that each time, each week, each month, each fortnight, a set amount comes out. It’s literally going from paycheck to pension. It’s that whole better management of cash flow. Market movements have less of an effect on drawdowns. It’s not a large, chunky drawdown. If the markets come backwards, you’re only storing out a smaller amount to meet that required pension payment. And also what I like about it is it’s a systematic approach. It’s regular payments. It reduces the risk of not meeting those standards. It makes us more actively involved, and it means It means that we can see what’s happening, and we’re reducing the risk of not paying our minimum because we’re looking at it constantly.

Look, to answer that question in a shorter way, your accountant or the advisor that’s mentioned this to you is doing a good thing to mention it and say, “Hey, it could be worth considering these regular payments”. But no, it is not at all required, as long as you meet that annual minimum.

Question 3

What are the pros and cons of entering pension phase with accumulated losses for capital gains?

Accepted Answer

https://www.youtube.com/watch?v=fXyuwTQqllI

Q: Given that in pension phase income is exempt from tax, I’m wondering about the pros and cons of entering into pension phase with accumulated losses for capital gains. Does it matter at all?

A: So, this is a really current topical, relevant question that’s been asked, especially with the proposal around the $3 million super cap and higher earnings on bounces above that. Now, I need to start this off with a quick disclaimer that what I’m about to cover is general information only. It’s how the laws are written, not necessarily how they apply to you or your fund. You need to sit down with your accountant or your fund administrator and work out how they deal with this issue. Very important that you apply this to your own fund, how your accountant or administrator has been applying it.

Let’s look at the background to this. We know that earnings in pension phase are exempt from tax. These are the current rules. I’m not talking about any proposed changes. I’m talking about how the current rules apply. Earnings in pension phase are exempt from tax.

Hence, while we have this $1.7 million soon to be indexed $1.9 million cap on our pension phase balances. Earnings on those monies are exempt from tax, including capital gains. Therefore, capital gains and losses that are attributed to those assets held in pension phase are effectively disregarded.

So, we have an asset, it’s used to pay pensions. Since it’s in pension phase, any capital gain or loss in that is essentially disregarding for tax purposes. That’s the first bit.

If you enter pension phase and your fund is holding existing capital losses, which might have been carried forward from prior years, they continue to be carried forward into a future financial year where they may be utilised. So if we start at pension, it doesn’t mean we may lose any of those carry forward losses.

We may not get to use them in pension phase because losses are essentially disregarding, but it might be in a later event, we’ve got more accumulation money, or we might have money where capital gains is applied, where we could first make use of these carry forward losses. So they’re not written off, they’re not forgotten. They just carried forward to a year where you might be able to use them. But again, check with your accountant, check with your administrator on how they manage that for you.

If you go to the ATO website, the wording it says is if your fund has a net capital loss, it can be carried forward each year until it can be offset against an accessible capital gain. The SMSF’s capital gain, less any losses equals the net gain, which is why I mentioned before, these amounts could be carried forward even if not used because you are in pension phase. The important thing to note here is that you do need to ensure that how these rules have been applied to your fund and it’s been done correctly that way.

We’ve got an article about exempt current pension income that you can look at on the website and it does talk about capital gains and capital losses.

Question 4

Do I need to complete a TBAR when commencing a Transition to Retirement (TTR) pension?

Accepted Answer

https://www.youtube.com/watch?v=shQF3HJ1Rmk

Q: I’m 61 years old and still working, I would like to start a Transition to Retirement (TTR) pension. Do I need to complete a TBAR to notify the ATO? And how often does one need to do this after turning 60 years old, if the answer is yes?

A: TBAR is the Transfer Balance Account Reports. There’s a really quick short answer, and the answer is no. You’re not required at all to complete a transfer balance account report for TTR pensions. That’s the short answer.

Let me explain it to you now and take you through processes. First of all, what is a TBAR? A transfer balance account report is the document, it’s the process we use to inform the tax office about our retirement phase or our pension phase balances. So, whenever we start a pension, whenever we start a retirement phase pension, we need to tell the ATO. Whenever we have, for instance, a lump sum commutation taken from our pension, we need to tell the ATO. When we stop a retirement phase income stream, so we say we don’t want it anymore, we take it back to accumulation, that’s an event, a transfer balance account event. All of these things need to be reported to the ATO, and they’re reported using a transfer balance account report. That way, the ATO tracks each of our transfer balance caps, how much we’ve used of that.

So, when we go to start a TTR pension, they are not considered to be in retirement phase. Remember that the earnings that the TTR pensions generate are no longer tax free. They used to be, but now they’re no longer tax free. If we take money out under a TTR and we’re over 60, those pension payments are tax free to us, but the earnings the fund generates on those pension balances are no longer tax free. It’s only retirement phase income streams where the earnings become tax free and TTR pensions are not in retirement phase. So, they’re not assessed under your transfer balance cap. Therefore, there is no transfer balance account report required. There’s nothing that you need to inform the ATO of in those circumstances. That’s the short answer.

What does need to be reported? Starting a retirement phase income stream, ceasing a retirement phase income stream (apart from balance exhaustion), commutations (Lump-Sums) taken from a retirement phase income stream, commencement of a reversionary pension, certain LRBA repayments, complying with an ATO commutation authority and when a TTR Pension enters retirement phase.

The reason why the TTR are not retirement phase income streams, and hence they don’t get caught under your cap. The earnings are no longer exempt, the tax at the relevant rate, and therefore the balance of the TTR doesn’t count towards your transfer balance cap. But there is a catch here. A transfer balance account event occurs, and it needs to be reported to the ATO using the TBAR when your TTR pension enters retirement phase.

So, let’s go through an example here. In 2020, Garth, age 64, starts a TTR pension. That TTR pension is not in retirement phase. I’m still working, I’m 64. There is no transfer balance account reporting. We don’t have to tell the ATO about that. But if my TTR enters retirement phase, I do need to tell the ATO. And that is because when the TTR, the transition retirement, enters retirement phase, it is therefore caught under my transfer balance cap. And it happens when I turn 65 automatically.

So Garth was 64, started the TTR, no need to report it. But when I turn 65, that pension automatically enters retirement phase. Therefore, that will automatically become in retirement phase, and I need to tell the ATO about that. It’s the balance at that time that obviously gets assessed against my transfer balance account. But it also enters retirement phase, if you meet a full condition of relief, such as retiring. In those cases, I would need to inform the super fund trustees that I’ve retired. Therefore, my TTR pension becomes a transition to retirement pension in retirement phase and gets caught and assessed against my transfer balance account. At each of those points in time, there’s an event which occurs that requires me to lodge a transfer balance account at the appropriate time, depending on my balances.

I hope that helps. It’s quite complex. But put it simply, TTR pensions are not in retirement phase, and therefore, no need to report under a transfer balance account report. But it will become a retirement phase pension at some point in time when you then need to inform the ATO on it.

SMSF pensions