What is an SMSF pension commencement?
An SMSF pension can be commenced when a member has satisfied a “condition of release”. An SMSF pension commencement is governed by superannuation laws and regulations (SISA).
Superannuation was established in the mid-1800s and has evolved into the system we know today. The overarching principal of super is to encourage employers and individuals to fund their own retirement by giving tax incentives to do this. To ensure the protection of a member’s super rules were put in place to “preserve” super until a member retires.
Superannuation is preserved or not available for personal use until satisfying a condition of release.
What is a “condition of release”?
Meeting a condition of release allows access to your superannuation; however, there may be restrictions on how you can withdraw your super, which are outlined below.
Reaching the age of 65 is the one of the most significant conditions of release. You can commence a pension and still be employed full time. There is no need to retire first and there are no cashing restrictions on your super.
However, turning 65 does not mean you must commence a pension.
Other conditions of release with nil cash restrictions include:
- retirement – turning 60 and not working in the future or ceasing gainful employment
- permanent incapacity
- terminal medical condition
What is a “cashing restriction”?
The form in which a benefit is paid can be limited by cashing restrictions imposed under SISA as well as the fund’s trust deed and governing rules. Subject to the fund’s trust deed, when there are “nil” cashing restrictions a member can voluntarily draw their super at any time they request it and in any form.
The only compulsory cashing requirement is triggered upon death. Death benefit payments are restricted to two lump sum payments per beneficiary or converting it to one or more retirement phase pensions or a combination of the two.
Cashing restrictions apply to a transition to retirement pension (TRIS) which can be accessed when a member turns 60 but can only be taken as a non-commutable pension.
Legal early release of super can occur when there are compassionate grounds, severe financial hardship, temporary incapacity grounds and release authorities for excess contributions or Division 293 tax. However, there are restrictions on how super can be cashed which include:
- a single lump sum payment if super is released due to compassionate grounds
- insurance proceeds received in relation to temporary incapacity can only be taken as a non-commutable income stream
- release of super cannot exceed the amount identified in a release authority
- only lump sums payments are permitted in relation to severe financial hardship
When does an SMSF pension commence?
After determining if a member is eligible to commence an account-based pension (ABP) the SMSF trustee must ensure the fund is permitted to pay an ABP and it is in accordance with the fund’s trust deed and SISA.
The ATO have set out when a pension commences in TR 2013/5.
The ATO view the commencement date of a pension:
- is after the capital of the pension is set which includes any contributions and rollovers
- is the first day of the period to which the first pension payment is made
- is in accordance with the terms and conditions agreed to between the SMSF trustee and the member, the fund’s governing rules and SISA
- cannot precede the date of the member’s application or the date agreed to in the pension documentation or when a dependant beneficiary becomes entitled to start the pension
- is an obligation to pay a pension until the pension ceases even if the member dies before any actual pension payment has been made
Examples extrapolated from ATO examples in TR 2013/5
Example 1: when a superannuation income stream commences – application date
A member of the XYZ Superannuation Fund applies, using the relevant product disclosure statement application form, to receive a superannuation income stream (an account-based pension) from their accumulated savings in the superannuation fund. The application form requires the member to specify the frequency of payments as monthly, quarterly, half-yearly or yearly and to specify the month in which the first payment is to be made. The governing rules of the superannuation fund also provide that the superannuation income stream payable will commence on the date of a member’s application. The member applies on 9 July, to receive monthly payments of $2,000 commencing in August, and the superannuation fund receives the application on 10 July. The superannuation income stream will commence on 9 July as the governing rules of the superannuation fund state it will commence on the application date.
Example 2: when a superannuation income stream commences – first day of the period
The facts are as per Example 1, but the governing rules of the XYZ Superannuation Fund state that the superannuation income stream commences on the first day of the month after a member’s application is received. As the member’s application is received on 10 July, the superannuation income stream will commence on 1 August.