Once you reach your preservation age, you may commence a transition to retirement income stream. You can commence a transition to retirement income stream whilst still employed.
When you have reached your preservation age and retired, you can commence a retirement phase income stream.
SMSF can pay a member the following types of income stream:
Transition to retirement income stream (pre-retirement)
A transition to retirement income stream allows you to receive your superannuation benefits as an income stream even whilst you are still working if you have reached your preservation age.
The pension account is converted from the monies accumulated in the superannuation fund. Investment earnings are added to the account and income stream payments are deducted from the account until the account balance is fully paid out or commuted.
Account based pension (retirement phase)
A retirement phase account based pension is a way of receiving your superannuation benefits as an income stream, instead of a lump sum, after you have reached your preservation age and retired or have satisfy another condition of release.
The income stream account is converted from the monies accumulated in the superannuation fund. Investment earnings are added to the account and pension payments are deducted from the account until the account balance is fully paid out or commuted and paid as a lump sum.
The pension account may be partially commuted to paid lump sum benefits payment, in addition to the income stream.
Taxation of benefits
In the superannuation fund
When you convert your accumulation benefits to a pension (income stream), there is no tax payable. The earnings (income and capital gains) from the capital that support the pension is exempt from tax if you have retired, or is age 65 years and over. The amount in retirement phase is limited by the transfer balance cap. If you are under the age of 65 and not retired, the earnings from the capital that support the pension is subject to normal superanuation rate of taxation.
Member over the age of 60
Your income stream payments and any lump sum withdrawal are tax-free. The trustee is not required to report the pension payment to the Australian Taxation Office (you are not required to include these income stream payments in your income tax return).
Member under the age of 60 and over preservation age
Part of your income stream payment may be tax free (tax-free component are tax free, and is generally made up of non-concessional contributions), and the balance will be taxable. The taxable component of your income stream payments are tax at your marginal rate plus Medicare levy. You will also be eligible for a 15% tax offset.
The tax-free and taxable components of superannuation benefits payment must be paid proportionately.
What do I need to do to commence either a transition to retirement pension or an retirement phase account based pension?
You should ensure that the conversion from accumulation to pension is effective and appropriately documented. There are also Super Transfer balance account report (TBAR) reporting requirements to the Australian Taxation Office as part of the event-based reporting framework. This is in addition to the annual tax return. For certain SMSF, the TBAR is due in the quarter the pension is commenced.
For existing clients - please contact us to have us prepare the commencement documentation and ATO reporting.
To have Superannuation Accounting Services prepare the commencement documentation and ATO reporting for you, download the Commencing a Pension form or contact us on 1300 735 254 to obtain one, complete it and return to us.