Only two types of income stream can be commenced from a superannuation fund:
- ‘account based’ income streams (pensions or allocated pensions), which can be paid by all types of funds
- ‘non-account based’ income streams such as annuities, which cannot be paid by SMSFs
With an ‘account based’ income stream, the assets supporting the pension are directly attributable to the member and the member’s account balance rises/falls as the market value of the assets change.
Non-account based income streams do not have an account balance attributable to the member. They include immediate annuities which are payable for a fixed term for life. SMSFs are not allowed to pay a non-account based income stream however, the member’s funds can be used to purchase the annuity from an external life insurance company.
Pensions – minimum payment
A key feature of an account based pension is that a minimum payment has to be made each financial year. The minimum pension depends on the pensioner’s age as follows:
The minimum that can be paid is worked out each July 1, based on the pensioner’s age on that date. The percentage is the member’s account balance with assets valued at net market value.
If a pension is commenced mid-year, it is adjusted to reflect the part of the year for which payments were made. For example, suppose a pension commenced on January 1, 2014 for a super fund member who was aged 65 at the time. This means that the pension period covered 181 days of the financial year and the minimum pension payment would therefore be: (181 days ÷ 365 days) x 5% = 2.479%. So, in the first year, the pension payments have to be at least 2.479% of the member’s initial pension account balance.
Pension payments must be made at least once a year, however they can also be paid more frequently, such as on a monthly, fortnightly or weekly basis.
If you commute a pension (that is, stop a pension) mid-year, then the pro-rated minimum pension has to be paid before commutation.
Capital can’t be added
Once a pension has been commenced, capital can’t be added to it. The only effective way to add capital to a pension is to stop it (called a commutation), bring it back to the accumulation part of a fund, combine it with other money and then commence a new pension. You should seek professional advice on this option.
Steps to starting a pension
These are some suggested steps when starting the payment of pension:
- Check your fund’s trust deed to make sure you can pay a pension (don’t rely on your fund’s general compliance or catch-all clause)
- You may need to prepare a Product Disclosure Statement
- The member should formally accept the pension’s terms and conditions
- Confirm in writing back to the member the nature of the pension
- Document the pension in the fund’s records including any decision to segregate assets
- If necessary, the super fund applies to become a PAYG withholder, relevant if the pensioner is under 60 when the income is paid
- Diarise the payment of pension payments to make sure they are paid on time