Pension standards for SMSFs

This information explains the pension standards that apply to self-managed super funds (SMSFs) in relation to account-based pensions – also known as a super income stream.

Account-based pensions

An account-based pension is an income stream paid from a super account held in the member’s name. The amount supporting the pension must be allocated to a separate account for each member.

Pensions commenced before 1 July 2007

For pensions that commenced before 1 July 2007, the SMSF must continue to pay them under the previous pension payment standards, unless the pension is an allocated pension.

For allocated pensions, the SMSF can choose to start paying under the minimum standards any time after 1 July 2007 without having to commute and start a new pension, provided this is permitted by the rules of your fund.

Pensions commenced between 1 July and 19 September 2007

Pensions that commenced between 1 July 2007 and 19 September 2007 may be paid under the previous or the new pension rules, provided this is permitted by the rules of your fund.

Pensions commenced on or after 20 September 2007

All pensions that commence on or after 20 September 2007 must meet the minimum pension standards.

Minimum pension standards

Pensions that SMSFs pay must satisfy all of the following minimum standards:

• The pension must be account-based, except in limited circumstances.
• You must pay a minimum amount at least once a year. From 1 July 2017, partial commutation payments do not count towards minimum annual pension payments.
• Once the pension has started, you cannot increase the capital supporting the pension using contributions or rollover amounts.
• Where a member dies, their pension can only be transferred to a dependant beneficiary of that member.
• You cannot use the capital value of the pension or the income from it as security for borrowing.
• Before you can fully commute a pension, you must pay a minimum amount in certain circumstances.
• Before you partially commute a pension, you must make sure there are sufficient assets to pay the minimum amount, if you haven’t already done so.

All pensions that satisfy the minimum standards will generally be treated as super income stream benefits for income tax purposes. This means the fund may be able to claim an exemption for the income earned on pension assets, called an exempt current pension income (ECPI).

Failing to meet the minimum pension payment standards for an income stream now not only means the fund loses ECPI for the income year, but that there are also transfer balance account consequences. These include:

• the credit that arose when the member started the income stream remains in the individual’s transfer balance account
• the trustee must report to the ATO the date that the super income stream ceases to be in the retirement phase for transfer balance cap purposes. This creates a debit in the individual’s transfer balance account at that time. The value of that debit is the value of the super interest which that supports the income stream just before it stopped being a super income stream. In most cases, this will not equal the original credit, due to payments made over time

Temporarily reducing superannuation minimum payment amounts

For the 2019–20 and 2020–21 income years the government reduced the minimum superannuation payment requirements for account-based pensions and similar products by 50%.

Transfer of pension

If a member dies, the SMSF pension can only be transferred or paid to a person who is a dependant of the member, which includes:

• a surviving spouse or de facto spouse
• a child of the deceased who is under 18 years old
• a child of the deceased, aged between 18 and 25 years old, who was financially dependent on the deceased
• a child of the deceased, aged 18 years old or over, who has a permanent disability
• any person who relied on the deceased for financial maintenance at the time of their death
• any person who lived with the deceased in a close personal relationship where one or both of them provided financial and domestic support and personal care.

Transition to retirement

Transition-to-retirement income streams (TRIS) commencing on or after 1 July 2007 must satisfy the minimum pension standards.

In addition, pension payments must be restricted to a maximum of 10% of the pension account balance:

• as it stands at 1 July of each financial year, or
• at the commencement day of the pension.

If you have any questions, feel free to ask them in the comment section. We will be happy to answer all your queries.