Simple Account Based Pensions - Retired and Aged 55 to 59

A Simple Account Based Pension is simply an income stream that you receive from your SMSF when you retire. This simply means that periodically (eg each month or other period you nominate) cash is transferred from your SMSF Bank Account to your Personal Bank Account for you to fund your living expenses in retirement. Essentially nothing changes when you commence a Simple Account Based Pension. That is your investments stay as they are. All that happens is that the ATO is notified that you will start accessing some of your super as an income stream.

Summary of Simple Account Based Pension Benefits (incorporating rules as announced in recent Government Budget):

A Simple Account Based Pension is almost the perfect investment vehicle in which to have your investments from a taxation and accessibility point of view. Consider the benefits:

> The tax rate of your SMSF reduces to NIL when you commence a Simple Pension from your SMSF.

> You never pay tax on your investments' earnings in the Fund after commencing a Simple Pension.

> You never pay tax on your investments' capital growth in the Fund after commencing a Simple Pension.

>You receive a cheque from the ATO each year equal to any franking credits received by your SMSF.

> You can access any level of income from your Fund subject to an aged based minimum amount.

> The income you access from the Fund is concessionally taxed up to age 60 and tax free after age 60.

> You can take lump sum amounts whenever you want with no limitation.

> Tax may apply before 60. No tax however will apply to any lump sum withdrawals once you turn 60.

> You do not have to change your SMSF Investments when you start a Simple Account Based Pension.

Minimum Pension Income

You will be able to choose the amount you take as a Simple Account Based Pension each year subject to a minimum percentage drawdown of your account balance depending on you age as follows:

In the Pension Commencement Year the percentage to be taken is applied to the Commencement Value of the Pension in that year (prorated if commenced part way during the year). Importantly each Financial Year the Pension Balance is recalculated on 1 July and the percentage is applied to the new balance on that date to determine the minimum amount that must be drawn in the relevant year. The percentage is applied to the balance of your Fund at July 1 each year to determine the minimum amount that must be drawn in the relevant year. There is no maximum amount you need to take.

Pension Drawdown Relief

For the 2009 and 2010 Financial Years the Minimum Pension Drawdown required to be taken when you commence a Pension, has been reduced to an amount equal to half the minimum amounts detailed above.

For example for a person aged between 55 and 64, the Minimum Pension Drawdown was previously 4% per annum. Under the Pension Drawdown Relief changes the Minimum Pension Drawdown has been reduced to 2% per annum.

Payment frequency

Once you have determined the amount you want to take as a Simple Account Based Pension you must transfer the payments from your SMSF account to your personal account to evidence the pension payment. The nominated Simple Account Based Pension payment can be paid either monthly, quarterly, half-yearly or annual basis, but must be paid at least annually.

Taxation of Income and Capital Gains in the SMSF after commencing a Simple Account Based Pension

As detailed above the SMSF tax rate reduces to NIL when you commence a Simple Account Based Pension. This means that all income and capital gains the SMSF generates after the pension is commenced will be tax free. Importantly any accumulated capital gains up to the time of commencing the Simple Account Based pension will also never attract tax if sold after the Fund converts to Simple Account Based pension mode. For example assume you bought shares in the year 2004 for your Fund and they increased in value by $100,000 by July 2009 when you commenced a Simple Account Based Pension. As long as you sell the shares after July 2009 when you commenced the Simple Account Based pension you will never pay tax on that capital gain.

Taxation of Pension Payments made by the SMSF to you

When you retire and commence a Simple Account Based Pension between the age of 55 and 60 the income you draw is taxable at your personal tax rate. It is only tax free if you are above 60. However no tax is payable on the UDC (Non Concessional) portion of the income drawn (known as the exempt amount). A 15% tax rebate is also applied to the pension payment further reducing the tax on the pension paid. Given this, some tax may be payable on the Simple Account Based Pension income if commenced before 60. However if the Simple Account Based Pension income is the sole source of your income then you can generally take approximately $40,000 per year in income tax free. Some tax may apply on income drawn above this amount.

Taxation on Lump Sum Withdrawals

You can make lump sum withdrawals whenever you like from your SMSF once you have commenced a Simple Account Based pension. However lump sum withdrawals are subject to tax as follows (they are only tax free above 60):

Refund of Franking Credits

As detailed above because the SMSF tax rate falls to NIL when you commence a Simple Account Based Pension you are entitled to receive any franking credits on Australian Share Dividends in cash from the ATO. Franking Credits simply represent tax paid by Australian companies on dividends your Fund is receiving.  Given that the company has paid 30% tax and your Fund tax rate in pension mode is Nil, the entire 30% tax paid is refundable to your Fund. Example:  For every $10,000 received in fully franked dividend income, your Fund receives $4,285 as a cash refund from the ATO each and every year the dividends are paid, after you commence a Simple Account Based Pension!

Contributions after commencing a Simple Account Based Pension

You can continue contributing to your SMSF even after you commence a Simple Account Based Pension subject to the contribution rules which can be found here on our website.

What if a second Fund Member has not commenced a Simple Account Based Pension

If there are 2 members and the second member remains in accumulation mode (ie does not commence a Simple Account Based pension) the second members share of the SMSF still attracts tax at 15%. Of course they too can commence a Simple Account Based Pension when they retire reducing the tax rate on their share of the Fund to NIL also.

Commencing a Simple Account Based Pension

When you are ready to commence a Simple Account Based Pension ESUPERFUND will attend to all aspects of the Simple Account Based Pension setup process for you. You do nothing.

Free Setup

It is FREE to establish a Simple Account Based Pension.

Apply Now

To establish a Simple Account Based Pension (appropriate if you are over 55 and retired) simply visit our Online Application Form here.

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