SMSF stands for ‘self-managed superannuation fund.’ A trustee is appointed who stays responsible for every fund activity. Whenever a fund member moves to the SMSF retirement phase from the stage of accumulation, it is considered a significant milestone in the fund’s life cycle. However, there are several factors one needs to consider regarding this transition. This blog discusses how to manage your SMSF for retirement in detail.
The Current Scenario In Australia
In this section, we provide some specific information about the current SMSF situation in Australia.
- Of the total number of current self-managed superannuation funds in Australia, 70% are two-person funds. Two-person funds are managed by couples, who may retire together or at the same time.
- Rather than moving directly into full-time retirement, some members go for a transition-to-retirement pension.
- As per the ATO (Australian Taxation Office), 46% of SMSF members have now crossed 60. The number of baby boomers who are already in retirement or approaching retirement age is increasing every day. So fund trustees need to be more focused on managing the SMSF retirement stage. Baby boomers refer to persons who were born in the period between 1946 and 1964.
- Right now, members of one-third of funds receive superannuation pensions, and most of the payments are transition-to-retirement payments.
- As per recent reports, about 52.5% of retirement-related superannuation assets are held in self-managed superannuation funds. However, this proportion is 32.1% in commercial funds and 6.1% in industry funds.
What Are The Factors Should SMSFs Consider?
SMSFs should consider the following vital factors.
- Whether to take professional advice from industry experts on the best methods to prepare funds for members who are retiring.
- Whether it is suitable to allocate assets for retirement, considering the need to pay benefits while confirming growth assets exposure.
- The SMSFs may require to sell some selected assets and buy others. One should never forget that property transactions can be time-consuming.
SMSF Pension Phase
Moving the SMSF from the accumulation stage to the pension phase is the usual way that members consider funding their retirement income.
- First of all, you have to know what account-based pension means. This pension is nothing but a personal retirement income account that is operated within a superannuation fund.
- In this case, you receive regular income payments, and your account earns an investment income. The investment income that is deposited into the account in the pension phase is exempt from tax.
However, before you can start receiving a pension with your super benefits, you should meet a condition of release. The most usual conditions of release include:
- Reaching the preservation age
- Taking a permanent retirement after reaching the preservation age
- Permanent incapacity
- Reaching age 65
How Is The Preservation Age Decided?
The preservation age is dependent on the time a person is born. As per the ATO regulations, the preservation age of a person is 55 years if they were born before 1 July 1960.
- A person born after 1 July 1960 but before 30 June 1961 has the preservation age of 56 years. The preservation age would be 57 years if the person was born between 1 July 1961 and 30 June 1962.
- For SMSF members born after 1 July 1962 but before 30 June 1963, the preservation age will be 58 years.
- The preservation age is 59 years for persons born in the period of the next one year. Last but least, people born after 1 July 1964 have a preservation age of 60 years.
How Can You Manage Your SMSF For Retirement?
Here we discuss the crucial steps to manage the retirement phase of your SMSF.
The trust deed of your SMSF should allow the account-based pension payment. With the help of a legal professional, you can run an overall review of the trust deed and make an update if needed.
Consider The Investment Strategy Of Your Fund
You should also check your investment strategy because the strategy you have used in the accumulation stage may also not be suitable for the pension phase.
- One of the key objectives of an account-based pension is to have capital throughout your lifetime. So it will be essential to review the trust’s investment strategy while setting up the account-based pension.
- It has been found in several studies that effects of negative returns become greater when withdrawing the capital, which does not happen in the accumulation phase. Keeping it in mind, your legal advisor can help you in drafting the appropriate SMSF investment strategy and can also help in retirement planning.
Make The Minimum Payments
When running an account-based pension, withdrawing at least the minimum payment amount is a must in every financial year. The minimum amount you need to draw will be calculated as a percentage of the account balance based on your age. It will allow you to maintain the tax-exemption status of the earnings of your SMSF in the retirement phase.
If you cannot satisfy the minimum payment amount conditions, the entire account-based pension balance will be treated as an amount deposited in the accumulation phase. In that case, your assessable investment earnings will be taxed at a rate of 15%.
The SMSF trustees must keep all transaction records safe, including those related to pension payments. The accountant can use these records to substantiate the tax position of your superannuation fund.
In general, pension payment documents should be kept for at least 5 years. Other records like minutes of trustee meetings should be kept for at least 10 years.
Are you receiving a pension from your SMSF? If so, then as per rules, you can nominate your spouse or any one of your dependent family members so that they can continue receiving it after you die. You can also nominate your dependents or your estate to receive a lump sum pension or payment after your demise. This pension is known as a reversionary pension.
Financial and taxation management is a complicated task and should be left to an expert professional. For references, you can consider contacting taxation firms or associate with experts like Palladium.