SMSF Pension Phase & Retirement

In accumulation phase, the fund is building a member balance and earnings on those assets are taxed at the concessional 15 per cent rate. In retirement phase, a member who has met a condition of release commences an income stream (an account-based pension), and earnings on the assets supporting that pension may be exempt from tax as exempt current pension income. A single SMSF can have members in both phases at the same time, and one member can hold both an accumulation interest and a pension interest. The mechanics of moving between the two are an accounting and compliance exercise; the decision to retire and draw a pension is a personal financial decision.

A condition of release is the event that lets a member legally access their super. Common conditions of release include reaching preservation age and retiring, reaching age 65 (whether or not you have stopped work), reaching preservation age and starting a transition-to-retirement income stream, and certain other events such as permanent incapacity. Until a condition of release with no cashing restriction is met, benefits are preserved and cannot be paid as a lump sum or unrestricted pension. The condition of release that applies, and the cashing restrictions attached to it, determine what type of income stream can start, so it must be documented before any pension commences.

An account-based pension must pay a minimum amount each financial year, calculated as a percentage of the member pension account balance at 1 July (or at commencement, pro-rated, in the first year). The percentage rises with the member age. If the minimum is not paid in full by 30 June, the income stream can be treated as having stopped for the whole year, which can cause the loss of the earnings tax exemption on those assets for that year. Because the percentages and any temporary relief measures change, trustees should confirm the current rates for the relevant year before setting the payment schedule, and we reconcile actual payments against the minimum as part of the annual work.

The transfer balance cap is a lifetime limit on the total amount of super a member can move into the retirement phase to support a tax-exempt income stream. Each member has a transfer balance account that is credited when a pension commences and debited for certain events, such as a full or partial commutation back to accumulation. Amounts above a member personal cap generally cannot stay in retirement phase and may need to be commuted or kept in accumulation. The cap is indexed over time and a member personal cap can differ from the general cap depending on their history, so the available cap space should be confirmed for each member before a pension starts.

TBAR is the ATO reporting that tracks events affecting a member transfer balance account. Reportable events include commencing a retirement-phase income stream, commuting a pension, and certain other transactions. SMSFs report these events to the ATO within set timeframes, and the timing of the obligation depends on the event and the fund circumstances. Getting TBAR right matters because the ATO uses it to monitor each member position against their transfer balance cap and to issue determinations where a cap is exceeded. We prepare and lodge the relevant TBAR events as part of administering a fund that has members in retirement phase.

Exempt current pension income, or ECPI, is the portion of a fund earnings that is exempt from tax because it supports retirement-phase income streams. Where a fund holds its pension assets separately from its accumulation assets, those pension assets can be segregated and their earnings exempted directly. Where pension and accumulation interests are pooled, the fund is unsegregated and an actuarial certificate is generally required to determine the exempt proportion of income for the year. The rules on when segregation is available and when a certificate is mandatory have specific conditions, so we assess the fund position each year and arrange an actuarial certificate where one is needed before finalising the annual return.

Eternity Group Accountants provides the SMSF accounting, tax and compliance work involved in moving a fund into retirement phase, but we are not licensed to provide personal financial product advice. The decision to retire, to commence a pension, how much to draw, and whether to commute or restructure an existing income stream all involve financial product advice that requires an Australian Financial Services Licence. We work alongside licensed financial advisers, document and implement the accounting and reporting once a strategy is decided, and refer clients to an adviser where personal advice is needed.