Pension Choices In Your Smsf
Technically, SMSF income streams will fall into one of either two categories:
* Account based
* Non account based
However due to law changes in the past decade, the reality is that the account based pension is now the only one that a SMSF trustee can create and offer as a new pension to members of a SMSF. Non account based pensions can only be purchased via an insurance company and are not generally seen as an attractive option.
Account based pension
Account based pensions are easily the most common pensions being taken by SMSF members today, as they provide a lot of flexibility and are fairly easy to manage. An Account based pension is essentially an income stream of periodic payments (e.g. monthly, quarterly, yearly etc) that are paid from your SMSF cash account over to your individual bank account for you to use in any way you wish.
Your investments within your SMSF do not have to change, although it will be prudent to check the strategy is still appropriate given the liquidity needs of a pension.
An account based pension will have the following characteristics:
* a minimum annual payment must be made, however there is no maximum amount
* you can withdraw lump sums from your account
* there is no residual capital value
* death benefit payments cannot be made to a non-dependant beneficiary.
Transition to Retirement account based pension
A transition to retirement pension (or TRAP) is a type of account based income stream that you can commence from your SMSF if you have reached preservation age (currently age 55) and are still working. As the name suggests, this type of pension was introduced to assist members who are in a transition phase to retirement, where they may still be doing some work (part time etc) but need a top up of income from their SMSF assets.
The TRAP is basically exactly the same as the account based pension described above, except for these major differences:
* You cannot take out (commute) any lump sums.
* There is a maximum limit to how much income you can take out each year of 10% of your SMSF account balance on July 1st.
Note that once you retire or fully satisfy another condition of release, you can convert this to a normal account based pension, and can have access to all of its flexibility such as taking out lump sums, and no maximum income limit.
Non-account based pension
These pensions are those that are paid either for life, your life expectancy, or a fixed term, and cannot be commuted (i.e. no lump sum withdrawals). Also known as defined benefit pensions, there were many of these in existence in the early 2000s due to the exemption of the assets funding a complying pension from the Centrelink assets test. However this all changed in 2004, with restrictions brought in to curtail this practice. Your options within a DIY Superannuation fund now are:
* Your SMSF cannot create and pay you out a new defined benefit pension. You can keep receiving one if it was paying you a defined benefit pension before 12 May 2004.
* The only way to access a Lifetime or Life expectancy complying pension is for your SMSF to purchase one of these pensions directly from a life insurance company. These are not very popular in SMSFs, because you give up a lot of control over the funds investments, and there are also disadvantages in terms of your estate planning.
by: Graham Parkes
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