In this guide
A greater level of control is the reason most often quoted for establishing an SMSF. In most cases, this refers to having more control over the fund’s investments.
But there can also be an increase in the level of control members have over their benefits in their fund, and how these benefits are paid when the member meets a condition of release allowing access.
For some members, withdrawing benefits as a lump sum could be appropriate. For others, accessing benefits under a pension may be the way to go. And in some cases, there may even be a benefit in using a multiple pension strategy in retirement.
What are the benefits of multiple pensions?
Unlike accumulation accounts, there is no limit on the number of pension accounts you can have within an SMSF. You can have as many pensions in your SMSF as your trust deed allows!
Where carried out effectively, there are a number of strategic benefits that can be achieved in running multiple pensions for the one SMSF member.
Tax planning
Each pension account has its own tax components that are relevant only to that pension. The taxable and tax-free components that make up the pension balance only relate to that particular pension.
If managed appropriately, an SMSF member can keep taxable super benefits apart from their tax-free benefits, which can of course provide numerous tax and estate planning benefits over time.
Estate planning
Another key benefit of running multiple pensions in an SMSF is the estate planning outcome that can be achieved. The ability for a fund member to deal with each pension separately can often lead to more positive tax outcomes for beneficiaries.
For this to work, the member will need to put in place the required reversionary pension election or death benefit nomination, and make sure that these are made for each separate pension. That way the surviving trustees can carry out the distribution of the deceased member’s balances in accordance with the paperwork in place.
Flexibility with payments
Running multiple pensions can also allow a fund member to tailor their withdrawal strategies. Again, by keeping the different tax components separate, a member can elect the pension from which they draw additional pension or lump sum payments.
For example, let’s say Amanda wants to increase her pension payments by $10,000 each year above the minimum required. She could choose which of her two pensions she draws that additional amount from.
As Amanda is over 60, all payments she receives from her super are tax free, so she could take the additional $10,000 from pension 1 which has the higher taxable component and the pension where tax may become an issue if it were to eventually be paid to a non-tax dependent.
Increasing the pension payments or taking a lump sum (commutation) from the pension with the higher taxable component, could reduce the tax payable by a non-dependent beneficiary.
Process and procedures
Fund paperwork and documentation becomes even more important where a member runs multiple pensions in their SMSF. Labelling each pension with its own, unique pension identifier will also assist in the fund’s administration.
Consider using labels like “Amanda’s Account Based Pension #1” and “Amanda’s Account Based Pension #2” to clearly identify each pension.
Pension paperwork and other member requests should then clearly reference the pension that the request relates to.
For instance, if Amanda wants to request a $100,000 lump sum payment from a pension, her written request would then nominate the pension from which that payment should be made: “from Amanda’s Account Based Pension #1”.
Can I combine pensions later?
If, at some time in the future, you want to combine separate pensions, you will need to make a written request to the fund’s trustees to stop the pensions and have these rolled back into the accumulation phase of super.
Once this has been carried out for both pensions, you then need to go through the formal process of commencing a new, larger pension using these benefits now held in accumulation.
Unfortunately, you can’t just add the existing pensions together without carrying out this process as there is a strict pension rule that prohibits adding capital to an existing pension.
The bottom line
While the tax and estate planning outcomes can certainly be appealing to many SMSF members, it is important you understand the responsibilities and regulatory requirements when your SMSF is paying a pension.
Where there are multiple pensions being paid, you need to keep in mind that these requirements exist for ALL pensions.
It is also important to consider the complexities and costs involved in managing multiple SMSF pensions. It would be a good idea to chat with your fund administrator about any additional costs and record-keeping obligations multiple pensions may require.
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