How to start a pension from your super

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How to start a pension from your super

Setting up a pension from your super is actually more common than you think. While you can do this in a traditional super fund, by paying yourself an income stream – or account-based pension – from your self-managed super fund (SMSF) you have far greater control over the type of assets that will support the pension, how much you will be paid and more. Here’s how to get started. 

Am I eligible for an SMSF pension?

There are various factors you will need to take into account if you want to correctly set up your SMSF to pay out a pension. The biggest consideration is your eligibility. Importantly, you will need to ensure you meet the conditions of release for superannuation if you aren’t yet over the age of 65 and able to freely access your super.

If you aren’t yet permanently retired, you may still be able to access your super – and therefore have a pension start paying you from those funds – if you have reached your preservation age:

 

Born

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

From 1 July 1964

60

Minimum amount required

Aside from meeting the above eligibility criteria, you will also need to set up your pension in such a way that you can pay out the minimum annual amount. Until the end of FY2022–23, the minimum pension drawdown rates have been halved from their normal percentage factor:

 

Age of beneficiary

Percentage factor (temporary rate through FY22–23)

Under 65

2%

65–74

2.5%

74–79

3%

80–84

3.5%

84–89

4.5%

89–94

5.5%

95 or older

7%

Source: SuperGuide

 Note that there is no maximum pension amount unless you are using a transition-to-retirement pension, in which case it is 10% of the fund’s balance.

3 steps to starting a pension from your super

Ready to get started? It’s recommended that you work with an SMSF expert to ensure you comply with all Australian super laws and set up your pension correctly. In the meantime, here’s a quick overview of three key steps:

  1. Asset valuation: The value of the assets that will support your pension must be calculated first, and the market value of your account balance should be supported by objective data.
  2. Paperwork: The SMSF trustee must be notified, in writing, of your intention to set up a pension within the fund. A pension agreement must be created that includes information such as how often the pension will pay out, when the pension will begin, documents to be supplied in an ongoing capacity (e.g. annual pension statement), as well as a product disclosure statement (PDS).
  3. ECPI: According to SuperGuide, “Earnings on pension assets are tax free, so if there is more than one member in the SMSF and the fund has both accumulation and retirement assets, then exempt current pension income – ECPI – will need to be calculated.” There are two ways to calculate the amount of ECPI your fund can claim, so make sure you follow the correct method for segregated and proportionate assets.

Property investments in your SMSF

Beyond setting up a pension, many Australians with a self-managed super fund use it to invest in property. So if you are thinking about how an SMSF can add value to your lifestyle and help you grow your wealth even further, consider the benefits of property investments through your super as well.

“We have a number of clients who come to us for help setting up their SMSF, and they do so for a variety of reasons,” says Daran Thomson, Managing Director at Hallmark Consulting. “Investing in property is one of the biggest attractions of having an SMSF, and once you retire you can live in that home. Coupled with other capabilities such as being able to set up a pension through your super, it’s no wonder so many Australians are looking into managing their own fund.”

If you want to know more about starting a pension from your super or simply want advice on setting up an SMSF, the experts at Hallmark Consulting can help. Contact us today or call 1300 135 295 to learn more about how an SMSF can help you generate more wealth.