Drawing a pension from your SMSF
This is probably the moment you’ve waited for and probably the reason why you got a SMSF (self-managed super fund) in the first place. By the time you reach the age of 55, you can already start withdrawing money from your fund. But for some people, retiring on a super pension means never having to pay taxes again.
You can start a super pension the moment you satisfy a condition of release, like retirement, TPD or temporary or permanent disability, or financial hardship. You can also start a pension within the years leading up to the age of retirement the moment you reach the preservation age, which is 55 years. Now, SMSF have members in pension phase and some are in accumulation or pre-retirement phase, but there are also members that are in both phases at the same time.
Once your individual balance is in pension phase, you can no longer make contributions to that account, but some SMSF members have an accumulation account they can make contributions to and a pension account to withdraw from at the same time. This is easier to identify which account is tax free.
Types of pension
You can start with an account-based pension if you’re over the age of 65 or between the ages of 55 and 65 but retired. If you’re between the ages of 55 and 65 but you’re not retired yet, you can switch on an income stream with a transition to retirement pension (TT).
Account based pension is the most popular form of super pension, though there are restrictions on the amount you can withdraw from every year. Even with the withdrawal amount, there’s no upper limit on how much you can access or when. You can even withdraw lump sum amounts.
TTR or transition to retirement pension: If you’re between the age of 55 and 65 and you want to continue working full time or part time, you can withdraw up to 10% of your super balance every year. Like the account-based pension, there’s a minimum annual withdrawal of 4% from July 1, 2013 and no restrictions on the timing of payments.
By the time you reach 65, it’s a simple process to convert a TTR to an account-based pension. An even better deal is by the time you reach the age of 60, all the withdrawals from your funds including lump sum are tax free. There is also no tax to pay on any income or capital gains from assets supporting the pension. This gives you the advantage to supplement your wages with tax-free pension income while increasing your super balance at the same time.
You can also maximise the tax benefits of such a strategy by salary sacrificing your super contributions from your pre-tax salary.
And to top it all off, if you’re fund is in pension phase and holds fully ranked shares, the ATO or Australian Taxation Office will send you a refund cheque every year.