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Understanding transition to retirement pensions

If you have reached your preservation age you can use a transition to retirement pension to access your superannuation as a non-commutable income stream while you are still working. This may be particularly attractive if you have reduced your working hours and need to top-up your income to maintain your standard of living.

There was another great benefit of setting up the pension which was that all the funds supporting the pension move in to a tax exempt status. Yes that means those funds paid no earnings tax and in fact they received a full refund of any franking credits on your investments. For the average investor this can increase your returns by 0.5% to 1% a year risk free every year! However that tax free status was removed as of 1 July 2017.

The strategy still remains effective for those needing a boost in income or those who can combine the pension with salary sacrifice.

What is a transition to retirement pension?

Transition to retirement pensions allow you to access your superannuation as a non-commutable income stream, after reaching preservation age (see below), but while you are still working.

The aim of these income streams is to provide you with flexibility in the lead up to retirement. For example, you may choose to reduce your working hours and at the same time access your superannuation as a transition to retirement pension that can supplement your other income. It may also allow you to salary sacrifice to give your retirement savings a boost.

Not all superannuation funds offer the transition to retirement pensions, so you need to check with your own fund to see if they do. You can also start one in a self-managed superannuation fund.

Are there any special characteristics?

These pensions are essentially like a normal account-based pension, but with two important differences.

Firstly, they are non-commutable, which means they cannot be converted into a lump sum until you satisfy a condition of release, such as retirement or age 65.

Secondly, you have a minimum pension amount you must withdraw each year but you can only withdraw up to 10% of the account balance (at 1 July). No lump sum withdrawals are allowed.

What is my preservation age?

Your preservation age is generally the date from which you can access your superannuation benefits and depends upon your date of birth.

Date of birth Preservation Age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
After 30 June 1964 60

How are transition to retirement pensions taxed?

Transition to retirement pensions are taxed the same as regular superannuation income streams.

If you are under age 60, the taxable part of your pension will be taxed at your marginal rate, but you receive a 15% tax offset if your pension is paid from a taxed source*.

However, once you reach 60, your pension is tax-free if paid from a taxed source*.

  • Most people belong to a taxed superannuation fund. Some government superannuation funds may be untaxed and you will pay higher tax on pensions.

Can you still contribute to superannuation?

As long as you are eligible to contribute, you and your employer can still contribute to superannuation for your benefit. In any case, your employer’s usual superannuation guarantee obligations would still apply. You need to have an accumulation account to pay these amounts into.

Is a transition to retirement pension right for you?

Transition to retirement pensions can provide you with flexibility in the years leading up to your retirement and can help to boost your retirement savings in some circumstances.

People who might find the transition to retirement pensions attractive include those who:

  • have reduced working hours from full-time to part-time, eg down to three days per week. The reduced salary can be topped up with income from the transition to retirement pension
  • are able to salary sacrifice to your superannuation or your spouse’s super for tax savings – the outcome of combining the transition to retirement pension with salary sacrifice can be a greater build-up of superannuation savings by the time you reach actual retirement

The transition to retirement rules and associated strategies can be very complicated. It is recommended that you seek expert advice from your financial adviser before deciding if this type of income stream and strategy is right for you.

Want a Superannuation Review or are you just looking for an adviser that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options. Do it! make this year the year to get organised or it will be 2030 before you know it.

Please consider passing on this article to family or friends. Pay it forward!

Liam Shorte B.Bus FSSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF016_Fellow_Logo_CMYK

 color logo with background_page_1-3-1

Tel: 02　9899 3693, Mobile: 0413 936 299

PO Box 6002 BHBC, NORWEST NSW 2153

40/8 Victoria Ave , CASTLE HILL NSW 2154

Suite 4/1 Dight St, Windsor NSW 2765

Corporate Authorised Representative of Viridian Advisory Pty Ltd (ABN 34 605 438 042) (AFSL 476223)

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

11 Comments
by SMSF Coach - Liam Shorte on March 14, 2012  •  Permalink
Posted in Asset Allocation, Binding Death Nominations, Financial Planning, Franking Credits, Pensions, Reversionary Pension, SMSF, Superannuation, Tax Planning, Term Deposits, Trustee
Tagged , , , , , , , , , , , ,

Posted by SMSF Coach - Liam Shorte on March 14, 2012

https://smsfcoach.com.au/2012/03/14/understanding-transition-to-retirement-pensions/

7 Common SMSF Pension Errors

Having set up over 120 pensions and taken over many other clients we know that having the right documentation and following the guidelines set down for accessing pensions is essential to remain compliant and access tax exempt status. Here are some of the common mistakes we see on documentation of pensions that clients bring to us from other sources.

1.  Pension entitlement – don’t bend the rules

You must be over the preservation age to commence a pension. This means that you must have reached the preservation age at the time the pension documents say the pension starts.  A common mistake is to assume this means at the time the first pension payment is made, which is wrong. For example, you may be turning  which is your preservation age on the 1st of October and think that you can start the pension on the 1st of July but not pay any pension payments until after the 1st of October and get the full year of tax exempt  income. This is not possible; in order to start the pension you must have reached the preservation age at the 1st of October. the income for that year will be split pro-rata across the period in accumulation phase pre- 1st of October and in pension phase after that date.

2. Market valuation of assets funding the pension

SMSF Advisors, Accountants and trustees must make sure the assets of the fund are valued at market rates before the pension is calculated. Further they should ensure the assets are revalued at the end of financial year. This is important in determining the level of pension in the coming year is correct and reflects the true value of the assets in the fund. There used to be some leeway especially with property but auditors now seem to be implementing a more rigorous checking system to ensure property values are updated annually.

3. Use a Comprehensive Pension Kit

Timely documentation is essential to ensure that the pension actually commences when you want it to commence. Typically, a pension may start well before an actual pension payment is made as often the financials for the SMSF are not completed yet. Often the pension start date will be 1st July and the actual pension payment may be made quarterly or half-yearly later in the year. The pension kit should reflect this and include at a bare minimum such things as a pension request form from the member to the trustee(s), minutes of the trustee acknowledging and agreeing to the request, notification from the trustee to the member with a draft pension agreement stating the type of pension, start date, frequency of payments and if a reversionary pension is to be applied.  Importantly, it should also include a Product Disclosure Statement which is a legal requirement. The initial pension documentation does not have to have the exact figure of the pension amount but should refer to the fact that this figure will be clarified once the financials are completed. We update the initial kit with a set of minutes after the financials are provided which shows the exact amount in the pension and the relevant minimum and maximums or selected pension payment for that year and the Tax free component of the pension.

Your SMSF advisor of accountant should be able to help with this documentation.

4. Minimum Pension Payments (don’t ignore letters from your advisor!)

Pension payments are only tax-free if you met the conditions required to take advantage of the Tax Exempt Pension Income within the fund (0% tax on the income from the assets supporting the pension). The minimum pension amount must be paid within the financial year. This means that the pension payment must physically leave the SMSF bank account by the 30th June. That is a benefit is paid when the member accepts the money, banks the cheque which is subsequently honoured or receives a credit by way of electronic transfer from the SMSF. As an example, if at the 30th June you have made $6,000 worth of pension payments but your minimum pension payment for the year is $10,000, the $4,000 cannot be carried over and paid at a later date.  In this instance the fund has failed to meet its pension requirements and the pension would be invalid and the entire pension account subject to tax for the full year.

During the financial year all pensions paid must be paid in “cash”;. That is a benefit is cashed when the member accepts the money, banks the cheque which is subsequently honoured or receives a credit by way of electronic transfer from the SMSF. Therefore if a member receives a cheque dated 30/6 and banks it after 30/6, this amount cannot be classed as “cash” for the year ending 30/6 on the cheque. Also a member cannot receive a pension via an in-species transfer from the SMSF to the member.

Our process is to remind clients in April/May each year by advising them in writing the minimum amount payable by the 30th June. We ask clients to confirm they have taken these payments by ticking a questionnaire and returning it to us. If you are receiving a Transition to Retirement Pension the advice also indicates the maximum amount of pension and requests confirmation that this has not been exceeded.

Some strategies are in place for correcting errors before the 30th of June but once that clock ticks over to 1st of July there is little that can be done to amend strategies.

5. Tax and Estate Planning -Tracking the Tax Free Component Amount/Percentage

On commencing a pension the Tax Free and Taxable Components need to be calculated. This percentage split remains the same for the life of the pension. The tax free percentage is calculated by dividing the Tax Free Components by the total starting balance of the pension. The Tax free component should be shown in your Pension Kit (once financials completed) and then reaffirmed in your members account statement annually.

Why is this important if Pension payments are tax free?

The tax free component does not refer to the annual pension payments. The Tax Free Component percentage becomes relevant upon death of the last member without a reversionary beneficiary and can make significant difference to the tax paid by your dependents (particular adult children). Good pension planning may see more than one pension being set up for a member with each Pension allocated towards the most tax efficient recipient beneficiary. i.e. spouse may receive pension with low tax free % while adult children receive the pension with a higher Tax free %.

Some smaller accountants or those who do not have the relevant software may not be tracking your Tax Free component and this may cause a problem later when your remainder pension needs to be distributed.  Check your last statement and If in any doubt you should discuss with your accountant or SMSF Advisor.

6. Ongoing Contributions

A member’s pension account cannot receive new contributions during the year. You can make contributions but these contributions must be credited to a separate accumulation account. A SMSF a member may have more than one pension account but cannot have more than one accumulation account. As an aside this is necessary for a Transition to Retirement Strategy combined with Salary Sacrifice to work properly.

You can rollback (stop) a pension and add the accumulation account balance and then start a new pension.  We term this as RCR (Rollback, Consolidation and Recommencement). Before stopping a pension you must ensure that you first pay the minimum pension to keep the fund tax exempt for the year to that date. For this reason we often rollback the pension at the end of the financial year and recommence on 01st July.

7. Actuarial Certificate

If you have a pension account and accumulation account during the year (i.e you have made contributions) and the fund’s assets have not been segregated you will need to obtain an actuarial certificate to identify the tax exempt percentage of the investment income. The Actuarial Certificates are normally outsourced by the Accountant to an Actuary but you should ensure that they do take responsibility for arranging it for you annually.

As you can see these pension rules can be a minefield to negotiate and advice from a SMSF Specialist Advisor is highly recommended. Through Verante’s SMSF Coaching Service we remind our clients that when it comes to “their money” that there is no such thing as a silly question. With pensions it is essential to get it right up front and double-check before June 30th!

I hope these thoughts  have been helpful and please take the time to comment if you know of other common mistakes as I know this is not an exhaustive list. Would love some feedback as well.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02　98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of  Viridian Advisory Pty Ltd (ABN 34 605 438 042) (AFSL 476223)

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

1 Comment
by SMSF Coach - Liam Shorte on February 25, 2012  •  Permalink
Posted in Divorce, Financial Planning, SMSF, Superannuation, Tax Planning, Trustee
Tagged , , , , , , , ,

Posted by SMSF Coach - Liam Shorte on February 25, 2012

https://smsfcoach.com.au/2012/02/25/7-common-smsf-pension-errors/

10 common mistakes made by many SMSF Trustees

I run regular sessions educating Trustees in small groups on how to utilise their SMSF and to avoid common mistakes so I thought I should share the more common ones. Self managed superannuation funds can be kept simple or they can involve very complex strategies. The superannuation system has many rules and regulations that members need to adhere to.  To ensure that you avoid the traps when it comes to self managed superannuation read on! Errors happen

1.    Jumping in too early with a low balance.

Unless you expect to make regular large contributions in the coming years or expect to put a large lump sum (e.g. inheritance) in soon, the administration fees of maintaining a Self Managed Superannuation Fund will erode away any profits and may also eat into your contributions.  The general agreed rule of thumb among honest SMSF professionals for a minimum balance for a Self Managed Superannuation Fund would be $200k. This would only be on the proviso you would be making contributions at or near your concessional cap depending on your age and that you may also be adding some non-concessional funds on a regular basis so that your fund has $400-$500K within 3-5 years.

If there are 2-4 members that are contributing to the fund with frequently largely sized contributions this can justify the use of a self managed superannuation fund earlier.  Just remember that generally it costs around $2,200.00 per annum in auditing, accounting, tax agents fees and ASIC fees for the fund as well as a general 1% investment fee.

2.    Failing to educate yourself first, before you open your fund so you know the basic SMSF rules.

Self managed superannuation funds can be very complex, if you do not know the basic rules of a fund and you are not using a fund administrator like an Accountant or a specialised service, you are asking for trouble! As the number of self managed superannuation funds increase rapidly the ATO as regulators will begin to take a stronger position.  Currently non compliant funds can lose up to 46.5% of the funds assets to tax plus fines for the Trustees!

There is jargon like concessional and non=concessional contributions and tax free and taxable components so take the time to understand them.

The main reasons of funds losing their compliance status is due to providing loans members. Anyone who has just started a self managed superannuation fund whether they have a manager or not that controls the funds should know the basic rules.

Here are some places to start:

ATO central access point for information on SMSFs  http://www.ato.gov.au/super/self-managed-super-funds/

The SMSF Association is pleased to provide you with this ATO SMSF Trustee online resource. ATO approved SMSF Trustee Education Program

By the end of this course, you will have learnt;

  • The basic facts about Superannuation and Self-Managed Superannuation Funds
  • How an SMSF works
  • The investment rules for SMSFs
  • The administration process to keep your SMSF healthy.

http://www.smsftrustee.com/ The Self Managed Superannuation Fund Trustee Education Program has been released by the Joint Accounting Bodies

We run regular seminars on educational topics for SMSF Trustees in groups of 6-10 people. Contact us for more details liam@verante.com.au 

 3.    Drawing on your SMSF for business or personal needs – Read and learn to stick by the Sole Purpose Test

Always remember it is your money but not yet! You are receiving generous tax concessions for providing for your retirement. Break the rules and you will lose those concessions! Self managed superannuation funds are not to be used to fund personal or business needs of the members of the fund or their relatives.  While many may be able to justify a small loan for a short period of time there is a total restriction on lending to members of the fund or related parties which may be extended family members or entities such as Family Trusts, Companies or partnerships.

Another example would be if you invested in a holiday resort unit managed independently by a management company and as part of the arrangement, you are entitled to private use of the apartment, 2 weeks per year. This arrangement would breach of the sole purpose test if used by your or any related party.

4.    Arranging for your SMSF to own your business premises without thinking the strategy through to the end

I actually love this strategy but there are positives and negatives to this situation and you will need guidance from your legal, accounting and SMSF Specialist Advisor. Many owners of small to medium enterprises use this as an effective strategy but others do a half-baked job and leave themselves exposed.

Pros:

  • Direct control of your super investments and a real understanding of where your money is invested.
  • The fund will pay only 15% tax on commercial rent paid
  • If the premises is sold no capital gains tax may be applicable once you are in pension phase and 15% or less if earlier.
  • You can be your own landlord with secured tenancy which allows you greater certainty when fitting out or installing equipment.
  • Keeps liquidity in the business to fund other costs.

Cons:

  • There are thousands of dollars in set-up costs and there are sometimes higher fees involved in getting a loan through your SMSF.
  • If a member of the fund dies without the proper insurance in place the fund may have to pay out death benefits leading to a rushed sale of the commercial premises.
  • If sold to a third-party then there is a possible loss of tenancy to the business which could destroy it.
  • There are strategies that can be built to avoid the cons, it is best to speak to an advisor so that they can see what is best for your personal situation.

5.    Choosing the wrong type of Trustee for the job

 76% of funds in this country still have Individual Trustees or a Trading company as trustee when a Sole Purpose Corporate Trustee would be much more suitable for long-term planning.

With individuals as trustees you need to change the name on all investments if one person leaves (divorce, death, Incapacity to act) or you add a new member (bring in a child, business partner or second spouse!). The paperwork involved is time-consuming and expensive just when it usually most inconvenient.

Please see my previous blog on this subject for more detailed discussion on this topic https://smsfcoach.com.au/2012/08/09/trading-company-as-smsf-trustee-or-sole-purpose-smsf-trustee-company/

 

6.    Failing to plan for death or serious illness of a member

If the fund is run by a husband and wife or run predominantly by one member, if that member passes it could have devastating impact on the remaining member and the self managed superannuation fund.  Strategies should be put in place so that all members involved in the fund understand the rules and regulations as well as the funds investment strategy.

Effort should be made to ensure the “silent” member is aware of and has met the Accountant, Auditor, and Financial Advisor and is comfortable that they could deal with them in the event of needing them. What’s the use in having a city based advisor if your spouse does not feel comfortable driving into the CBD. Choose a local Advisor for your later years.

All shares should be properly Chess sponsored and all members should have access to account numbers and passwords.

Binding Death Nominations and Reversionary Pensions should be reviewed regularly to ensure they still meet your wishes. The idea of leaving 20% to a son or daughter may have been fine when the fund was doing well but is it still a good idea in 2017? Make sure you do not leave your spouse short!

7.     Rolling to a SMSF without maintaining or transferring Insurance First.

One of the most important factors is to undergo a review of current insurances and to have life insurance integrated into your self managed superannuation fund.  When transferring from retail, employer or industry superannuation fund look to get “Transfer Terms” from insurers to open a new policy in the name of the SMSF without extensive underwriting. DO NOT LEAVE THIS UNTIL AFTER YOU HAVE ROLLED OVER! Despite your own perception of your health and vigour, you may find it hard to find new cover on the same terms or any terms so preserve what you have. Often we keep a small balance in a retail or industry fund just to continue the insurances in there at the group or discounted rates available.

8.    Getting behind on paperwork

More than just filing statements, trustees are required to document every decision that is made whether this is to make an investment, take out insurance, or change bank accounts. This should come in the form of minutes with details regarding who made the decision, on what day and where the decision was made.

The record keeping requirements of an SMSF can be quite onerous and failing to meet them is an easy way to fall foul of the ATO. Business owners usually have enough paperwork as it is, so paying professionals who can look after your record keeping may make sense for you.

9.    Exceeding the contributions cap

The cap on concessional contributions has changed so often in the last decade that confusion reigns each year.

The cap on concessional contributions for 2018/19  is $25,000. The after tax contributions (non-concessional) is capped at $100,000 per annum

There are a number of ways members can get caught out and exceed the cap. For example,

  • if you are paying for life insurance held in another super fund, the insurance premium can be deemed as a contribution. This premium would then be levied at penalty tax rates.
  • If your employer made last year’s June Super contribution in July of this year.

We can show you strategies for a couple to get up to $800,000 to $1,200,000 into super in one year by using a mix of contributions and a holding account strategy.

10.  Not having a proper Cash Hub and losing interest and paying unnecessary fees

If you go to your normal bank to set up a bank account for your SMSF, they will most likely suggest that you use a business bank account. These accounts generally have high monthly fees, transaction fees and provide little to no interest.

We estimated the average cash balance of SMSFs to be between $50,000 and $80,000. Based on these figures, by using business bank accounts, trustees may be costing themselves approximately $3,000 per annum in fees and lost interest.

There are better options out there. Look at Macquarie’s Cash Management Account almost matching the RBA cash rate (noting for first $5K). Link these to an ING Direct Savings Maximiser for the Fund or a RaboDirect Notice Saver Account paying up to 1.8 to 2.35% higher for cash. Use 6, 9 and 12 month Term Deposits where funds are not needed short-term.

Make sure all accounts are opened correctly in the name of all trustees. Get it wrong and it can cost a lot to rectify.

I hope these thoughts  have been helpful and please take the time to comment if you know of others common mistakes as I know this is not an exhaustive list.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02　98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of  Viridian Advisory Pty Ltd (ABN 34 605 438 042) (AFSL 476223)

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

3 Comments
by SMSF Coach - Liam Shorte on October 20, 2011  •  Permalink
Posted in SMSF, SMSF Management, Superannuation, Trustee
Tagged , , , , , , , , , , , , , ,

Posted by SMSF Coach - Liam Shorte on October 20, 2011

https://smsfcoach.com.au/2011/10/20/10-common-mistakes-made-by-many-smsf-trustees/

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