SMSF pension: How do I start one?

What is the difference between accumulation and retirement phase?

The two key differences between accumulation phase and retirement phase are:

• Earnings on fund assets during retirement phase are exempt from tax, while earnings during accumulation phase are subject to 15% tax.
• Retirement phase pensions, and other super pensions not in retirement phase (typically, transition-to-retirement pensions) are subject to minimum pension payment rules, while accumulation phase has no payment restrictions (assuming the fund member has retired and has reached preservation age, or has 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 opting for such a strategy requires additional compliance and administration requirements for an SMSF.

SUPER ALERT! Since 1 July 2017, the earnings on assets financing a transition-to-retirement pension (TRIP) are no longer exempt from tax (see SuperGuide article Less tax, more super? A transition-to-retirement pension is no longer the answer). Earnings on fund assets in retirement phase continue to be exempt from tax. Also, since 1 July 2017, Australians can transfer no more than their transfer balance cap ($1.6 million) into retirement phase (see SuperGuide article Retirement phase: A super guide to the $1.6 million transfer balance cap).

Entering the retirement phase

A member of an SMSF can choose from only two types of pensions – an account-based pension (which is in retirement phase) 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 super pension from your SMSF.

The two types of super pensions available are:

• Account-based pension: An account-based pension in retirement phase gives you unlimited access to your account balance but how long your money lasts depends on the investment returns that your pension assets deliver, and the amount you withdraw each year. Earnings on fund assets are exempt from tax. You also must withdraw a minimum amount each year, based on your age. I explain the minimum payments in the SuperGuide article Minimum pension payments for 2018/2019 year (and for 2017/2018 year).
• Transition-to-retirement pension (TRIP): A TRIP is a super pension, but is not treated as a super pension in retirement phase, which means the earnings on TRIP assets are not exempt from tax. A TRIP is available to those who have reached preservation age (at least age 55 and can be up to age 60, depending on your date of birth), 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, and you also must withdraw a minimum amount. I explain how TRIPs work in the SuperGuide article TRIPs: 10 important 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, 3^rd 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, SMSFs: How much does a DIY super fund cost?, but briefly here are some of the costs that you can expect for a SMSF in pension phase:

• Starting a pension: Between $220 and $1,100, 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 $880.
• Actuarial certificates (if you plan to make super contributions while taking a pension): Costs between $150 and $550, although since July 2017, expect much higher costs due to greater compliance requirements related to the $1.6 million transfer balance cap.
• SMSF 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 SuperGuide articles on SMSF compliance and SMSF administration, which may give you an insight into what services are available, and at what costs. Alternatively, use 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.

For more information about SMSF pensions…

For more information about SMSF pensions, see the following SuperGuide articles:

• SMSF Pension Guide: ATO’s top 20 tips
• SMSFs for Beginners: Updating SMSF trust deeds
• SMSF pension: How do I calculate my minimum pension payment?
• Retirement and tax: What are the minimum pension payment rules?
• TRIPs: 10 important facts about transition-to-retirement pensions
• SMSF pension: Stick with original tax-free and taxable components
• SMSF pension earnings remain tax-free after death
• SMSFs: Enough super to justify SMSF running costs?
• SMSF pension: Can I still make super contributions?
• I’m retired. If I return to work, what happens to my SMSF pension?
• SMSF pension: After making super contributions, when can I convert to another pension?