Starting an SMSF pension checklist

1. Eligibility

The first thing you need to do is check your eligibility. You can’t pay yourself a pension if you’re not of retirement age or haven’t met a condition of release. While you can start a transition to retirement pension from age 57, we will focus on retirement pensions in this checklist.

2. Check your trust deed

Your trust deed must allow you to pay an account-based pension so you need to check your trust deed and amend it if necessary.

3. Value the assets

You need to value the assets at market value that will be supporting the pension on the commencement date and, for ongoing pensions, on 1 July of the financial year in which the pension is paid.

This valuation is also the amount that will count towards the transfer balance cap of $1.6 million (see more below). It should be in line with the ATO’s valuation guidelines and based on objective and supportable data. An independent valuation is only needed if there are collectibles and/or personal use items in the fund.

4. Understand the transfer balance cap

The amount used to start your pension is fixed at its commencement date. You cannot add contributions to the pension balance, or transfer an asset from an accumulation account into the pension account, once it has commenced. Also, there is a limit of $1.6 million to the combined amount you can use to commence pensions. This is called your transfer balance cap.

5. Get across event-based reporting

Even though your transfer balance cap is applied every time you commence a pension, there are a number of events that may be required to be reported to the ATO. For example, a death benefit pension reversion or some limited recourse borrowing arrangements (LRBA).

This is what the ATO says about when such events need to be reported:

SMSFs that have any members with a total superannuation balance of $1 million or more on 30 June the year before the first member starts their first retirement phase income stream, must report events affecting members’ transfer balances within 28 days after the end of the quarter in which the event occurs.

If there are no members with balances of that amount, they only need to report transfer balance events each year with the fund’s annual return.

6. Understand the minimum pension amount

There is a minimum annual pension amount you need to pay yourself each year as per the table below.

Source: SIS Act

7. Apply to commence a pension

The member needs to make an application to the trustee to commence a pension and whatever else the fund’s trust deed says a member is required to do when commencing a pension.

8. Minute the commencement

Like all major decisions for your fund, the pension commencement will need a trustee meeting and a minute. The member starting the pension needs to say in writing that they wish to start a pension and a pension agreement needs to be drawn up, specifying all major details of the pension and how variations can be made to the pension.

9. Commence paying the pension

Setting up a direct debit from the fund to the member of at least the minimum pension amount helps ensure the account-based pension will meet its legal requirements and qualify for tax concessions.

10. Supply the product disclosure statement (PDS) if required

A product disclosure statement (PDS) may need to be supplied to the member starting the pension. However, it is not required if the trustee of the SMSF reasonably believes that the member has received, or has, and knows they have, access to all the information that the PDS would be required to contain (such as include key benefits, features, costs and risks of the product).

SuperConcepts executive manager, SMSF Technical and Private Wealth, Graeme Colley, says they are also trustees of the fund.

“[If a PDS is required] a pension PDS must be provided at the earlier of: (a) the trustee acknowledging receipt of the member’s election to take a pension; or (b) on the trustee making the first pension payment,” Colley says.

Many trust deed providers have pro forma PDS available for clients if one is required.

11. Obtain an actuarial certificate if required

If a fund has both accumulation and retirement assets then exempt current pension income (ECPI) will need to be calculated. ECPI is that part of the fund’s taxable income that is tax exempt as it relates to the income earned on investments that support the pension.

There are two methods for calculating ECPI – the segregated method and the proportional method. For the segregated method, the assets supporting the pension are known and are separated from the assets in accumulation phase. If the assets are mixed, then the proportional method needs to be used and an actuarial certificate is required to determine the proportion of assets in each stage.

For funds using the proportionate method, an actuarial certificate will be needed upon commencement of the pension and each year to clarify which assets support the pension and which assets are in accumulation phase.

A fund that only has members in retirement phase does not need an actuarial certificate. But, if at least one fund member has a total super balance in all super funds they belong to on 30 June in the previous financial year of at least $1.6 million the fund must use the proportional method. Where no member has a total super balance of $1.6 million or more and a pension is being paid the trustee can choose whether to use the segregated or proportional method.

The bottom line

Starting a pension is an important step for your SMSF; something that you want to make sure you get right. It may be worth considering professional advice, at least at the beginning, but it’s very important that you start thinking about it well before you expect to retire and have a plan in place prior to commencement.