There are quite a few administrative steps required to set up a pension. SMSF administrators often have kits with all the required documentation and can help to set up the pension.
When an SMSF member moves into pension phase, the investment strategy may need to be reviewed and updated to reflect any changes in the members risk profile and to include a decision on how assets will be drawn down to pay the pension payments. The limit that an individual can roll over into pension phase is $1.6-1.7 million (indexed) per person, depending on an individual’s personal Transfer Balance Cap. Any excess amounts above this Transfer Balance Cap will need to either remain in accumulation phase (with earnings subject to the normal 15% tax rate) or be withdrawn from superannuation after a condition of release has been met. If you only use a portion of the Transfer Balance Cap, the unused portion will be indexed.
Trustees may need to obtain an actuarial certificate and also consider asset segregation if members are in both the pension an accumulation phases. The assets used to support the pension must be segregated to obtain the tax-free status for these assets. This can be done by separately identifying the assets or through an actuarial calculation.
If the member is under age 60, the SMSF will need to register for PAYG withholding and deduct tax from each payment and a TFN declaration form needs to be completed by the member.
For SMSF members approaching retirement with account balances in excess of the Transfer Balance Cap each should consult a financial adviser for determining the appropriate asset allocation split between assets in accumulation phase (subject to 15% tax on earnings) and pension phase (tax-free). For couples with differing balances, a withdrawal and recontribution strategy (subject to contribution cap limits) into the other spouse’s account may be appropriate.