These days, almost all SMSF pensions are a particular type known as an account-based pension.
There are two types of account-based pension:
- a "retirement phase" pension - this is a pension being paid to someone who has retired or met another condition that gives them full access to their super, and
- a "transition to retirement" pension - this is a pension that's being paid to someone who doesn't yet have full access to their super but is old enough to start a pension. Anyone is old enough to start one of these pensions when they reach their "preservation age" (which is 60 for most people) but they have some extra restrictions. They are discussed further below.
Features of account-based pensions
The main characteristics of an account-based pension are:
- No fixed term – the pension finishes when your account runs out - i.e. once you've taken out all the money.
- Minimum annual pension payment – you must take at least a certain amount out of your pension each year. It’s worked out by multiplying the percentage below that applies to your age by your pension account balance at 1 July that year.
| Age you reached on your last birthday |
Percentage of account balance * |
|
Under 65
|
4%
|
|
65-74
|
5%
|
|
75-79
|
6%
|
|
80-84
|
7%
|
|
85-89
|
9%
|
|
90-94
|
11%
|
|
95+
|
14%
|
* sometimes there are special reductions to these percentages. For example, they were halved during 2020/21, 2021/22 and 2022/23 as a special concession during the peak of the Covid-19 pandemic.
- Adjustments are made if you start the pension during the year. For example, if you start a pension in January, only around half of the full year’s payment has to be made and the calculation will be done based on your balance in January (i.e. when you start the pension), not the previous 1 July. In fact, if your pension starts as late as June, you do not need to make a payment in that first financial year at all.
- You can stop (known as 'commuting') your pension at any time and return your benefit to a super accumulation account. You might do this if you no longer want to take so much income, for example, if you return to work. If you decide to do this, you have to pay your pension up-to-date first, for example, if you’re stopping your pension on 1 October, you would have to take roughly one quarter of the year’s minimum payments first.
- The fact that you’ve started taking a pension doesn’t prevent you from also having lump sums paid from your account (sometimes there are tax benefits to doing this or you may want to draw out a particular asset in specie). If your pension is a transition to retirement pension, there are some extra restrictions about lump sums (discussed below).
- Even if you take out lump sums, you still have to meet the minimum pension payment requirements. These are particularly relevant if you’re taking a very large payment as a lump sum and/or stopping the pension entirely.
- Starting a pension doesn’t prevent you from continuing to make contributions to the fund – these are just recorded separately in a new member account. You can’t simply add them to the pension once it is running.
- You can set your pension to continue to someone else (such as a spouse) when you die. This is known as a ‘reversionary’ pension. Note that you can generally only nominate your children to be your reversionary pensioner if they are minors, and even then, they have to cash out the pension when they reach age 25.
- As long as the pension meets all the rules, income generated from the proportion of the fund’s assets that supports retirement phase pensions is tax exempt. This special tax rule doesn't apply to transition to retirement pensions.
- There's a limit - known as the transfer balance cap - on the total amount of super anyone can put into a retirement phase pension over their lifetime. This amount changes from time to time (read our comprehensive guide to pensions here to understand more about how this limit works). The transfer balance cap doesn't apply to transition to retirement pensions.
Features of a transition to retirement pension
A Transition to Retirement Pension allows you access to your super money without retiring. This means you can:
- remain in the workforce and reduce your hours of work as you approach retirement, or
- boost your retirement savings by putting more of your pre-tax salary into super and replacing the foregone salary with pension payments. This is generally referred to as ‘salary sacrificing’ and is often more tax effective than simply taking the full amount as salary.
A transition to retirement pension has the same rules as a retirement phase pension but with three added requirements:
- you cannot take more than 10% of your account balance out as a pension payment in any given financial year. The same 10% limit applies regardless of when you start your transition to retirement pension, even if you started it in mid-June, you’d still be allowed to take up to 10% of the full balance before the end of the financial year.
- it's very rare to be allowed to take lump sums out of a transition to retirement pension.
- the investment income the fund earns from the assets supporting a transition to retirement phase pension are taxed at the same rates as the fund’s accumulation balances. As mentioned earlier, they don't get the special tax break applicable for retirement phase pensions.
As soon as you meet one of the conditions to get full access to your super (for example, retiring or turning 65), these limitations can stop applying and it will become just like a normal retirement phase account-based pension.
Read our comprehensive guide about pensions to understand more about running a pension in an SMSF.