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Your guide to setting up a pension account in your SMSF

Are you retired or thinking of retiring? Have you spent years saving up super, and now want to enjoy it? Well, we have some good news. A pension in your self-managed super fund (SMSF) offers a tax-free way to draw on your super. You can start reaping these benefits by setting up a super pension today.

A super income stream is an ongoing series of payments paid from a super fund to one of its members. As you near retirement age, you can start claiming a super income stream in the form of a pension, which will help ease you into the early years of retirement.

The pension payoff

When you are saving funds, your super fund is said to be in the accumulation phase. In this stage, earnings made on your investments are taxed at the rate of 15%. When you start withdrawing for retirement, it enters a pension phase.

Setup a pension account in your SMSF

Depending on your age and work circumstances, there are two types of pensions you can draw on: account-based pensions or Transition to Retirement Pensions.

The Transition to Retirement Pension

If you are not yet retired but getting ready to, a Transition to Retirement Pension can help ease the process. You can access this kind of pension if you have reached your preservation age, but are under 64 and still working. A transition pension allows you to receive up to 10% of the total balance of your super fund per year. As soon as you retire (or turn 65), your Transition to Retirement Pension will automatically turn into an account-based pension.

Account-based pensions

You can receive an account-based pension if you are over 65, or between your preservation age and 64 and retired. The benefits you receive are tax-free if you are over 60. When you commit to an account-based pension you can withdraw as much as you want, but there is a compulsory minimum. Depending on your age, you have to withdraw a certain percent of your account balance every year. If you don’t, you will lose the tax privileges that come with the pension phase.

Spend today, save for tomorrow

Drawing on your super with a pension doesn’t mean you can’t keep building your nest egg. Normally if you start drawing on an account, you can no longer contribute to it. However, your savings don’t have to stop in their tracks. If you start the pension phase, you can create a second accumulation account and continue to pay into it. Always keep thorough records of your pension payouts, to make sure you are in line with ATO laws and prepared for SMSF audits.

Setting up a pension will let you start enjoying the money you have worked so hard to save. Once you have identified the correct pension for you, the rest is easy.

If you want to learn more about SMSFs, download an information pack today.

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