How to Start an Account-Based Pension in an SMSF

Starting an Account-Based Pension in an SMSF requires more than simply taking money out of the fund. A formal process needs to be followed which is laid out step by step below starting with meeting a condition of release and ensuring everything is documented correctly. Before exploring the steps, it is important to understand exactly what an Account-Based Pension (ABP) in an SMSF actually is.

What is an Account-Based Pension (ABP)?

An ABP is a pension paid from an SMSF or other complying superannuation fund.  A pension is a regular income payment made to the member from their superannuation balance. Most pensions paid from an SMSF are ABPs. A lump sum can be paid from an ABP by partially commuting the pension balance. When a member reaches 65, or turns 60 or older (but before turning 65) and has retired, either permanently or after changing jobs, they may be eligible to start an ABP, as they have attained a condition of release. A member may be under 60, such as a spouse or an eligible child inheriting an ABP death benefit. A member aged 60 or over receives pension payments tax-free. The fund does not pay tax on income from the assets used to provide an ABP.

To qualify as an ABP, it must meet the pension standards set out under SIS Regulations. For tax purposes, a superannuation income stream must meet the same standards. For tax purposes, an ABP is a “superannuation income stream”, and each pension payment is a “superannuation income stream benefit”. The Tax Act then imposes a limit, known as the transfer balance cap (TBC), on the amount of super an individual can have as retirement phase pensions across all of their super interests.

Is a Transition to Retirement Pension (TRIS) an ABP?

A Transition to Retirement Income Stream is an ABP with additional conditions. A TRIS can only be started by someone who is 60 or older, not retired, and under 65. There is no limit on the amount that can be used to start a TRIS, as it does not count towards an individual’s TBC.  The fund does not receive any tax concessions on the income from the assets used to provide a TRIS. The member, 60 or over, receives pension payments tax-free.

Steps required to start an ABP

1. Eligibility of a member to start an ABP – A member must meet a condition of release, such as turning 65, when super is no longer preserved and is fully able to be accessed to start a pension.
2. Check the fund’s trust deed to ensure a pension can be paid.
3. A member should decide if they want to elect a pension beneficiary, usually the member’s spouse.
4. The commencement date of the pension is when the trustee and the member agree on the terms and conditions of the ABP, including the start date of the pension.
5. The pension balance cannot be added to with additional contributions. The pension balance, or capital value, is set at the start of the pension. Ensure rollovers or contributions have been made before commencing the pension, and any member concessional contributions have been correctly made and acknowledged by the trustee before commencing the pension.
6. Checking the member’s TBC to ensure they have sufficient space to start a pension.
7. Calculation of a member’s tax-free and taxable components, which are set at the beginning of the pension and do not change, but can affect the tax liability if a member is under 60 (such as a death benefit pension beneficiary). An amount may be commuted and rolled over into another fund, and the tax paid by a child beneficiary upon a member’s death depends on the underlying tax components.
8. Minimum pension requirement – The percentage of a member’s opening pension balance is the minimum pension payment required to be withdrawn for that year, or apportioned, if started part way through the year.

Member’s age at 1 July	Minimum Annual Percentage
<65	4%
65 to 74	5%
75 to 79	6%
80 to 84	7%
85 to 89	9%
90 to 94	11%
95 or more	14%

9. There is no pension minimum required to be paid when a pension is first started in June.
10. Ensure the SMSF has sufficient cash flow to make pension payments.
11. Value the fund’s assets at market value prior to commencing the pension.
12. Documentation required to start an ABP includes:
13. evidence of being 65 or 60 and retired – a statement from the member confirming their age and, if under 65, whether they are permanently retired or changed jobs after turning 60
14. member request to commence an ABP with date of commencement and the amount of the member’s super balance, such as 100% of the balance at 30 June or a specific amount, say $750,000
15. trustee resolution/minutes acknowledging the request from the member
16. trustee confirmation letter to the member, accepting the terms and conditions, and, if the member has elected a pension beneficiary, confirming that the trustees accept them
17. a product disclosure statement (PDS) can be given to a member commencing a pension but is not required if the trustee believes the member has information normally contained in a PDS, including fees, benefits and risks of the pension
18. a pension schedule which also identifies the minimum pension payment required for the year
19. report the pension in the fund’s Transfer Balance Account Report (TBAR) to the ATO, due by the 28^th day following the quarter in which the pension commenced

We are unable to advise you on whether an ABP is suitable for your circumstances, but we can assist you with the paperwork. Please feel free to contact us, as we are happy to help you.