We put a whole lot of effort into building our super so that one day we can retire on a comfortable pension. But, as with most things in a DIY super fund, there’s a bit of paperwork that goes along with the switch from the accumulation to pension phase of your fund.
This week, I begin a series of two articles that outline the 10 steps you need to follow to begin a pension in a self-managed super fund (SMSF).
Don’t try to take shortcuts. You must deal with everyone at arm’s length throughout the process, including yourself.
Check your fund’s trust deed before you begin your pension. Many deed provisions will influence what type of pension can be paid, when pension income can be paid, how those pensions are to be structured, operated and administered, and what type of member can be paid a pension. It’s generally not wise to rely on general compliance or catch-all clauses.
You need to determine why the pension is being paid. Broadly, there are four possible reasons to pay a pension:
- You’ve asked to start the pension. Your super fund’s trustee will need documentation to show that your Preserved Benefits and Restricted Non-Preserved Benefits can be released. If you’re aged less than 65 and ceased gainful employment (that is, doing a material mental or physical activity and receiving a tangible benefit for the work, such as money) before reaching age 60, you need documentation to show that the employment has ceased. You also need documentation that states you don’t ever intend to work for more than 10 hours per week.
- You’re aged at least 60 and ceased gainful employment after age 60, then a “gainful employment arrangement must have come to an end”.
- You’re aged over sixty-five and your fund’s governing rules demand that a pension be paid or you’ve requested one be paid. (Note: the super laws no longer make it essential that you take super benefits at age 65.) If any of these occur, the fund must pay the member’s super assets out either as one or more lump sums or as one or more pensions.
- You’ve requested a Transition to Retirement pension. That is, you’re over your preservation age (if born before July 1960 this is age 55) and you haven’t satisfied a preservation condition of release. In most situations this means you’re aged under 65 and not permanently retired.
The trustee must prepare a Product Disclosure Statement.
According to the Australian Securities and Investments Commission (ASIC), a Product Disclosure Statement (PDS) is meant to help “consumers compare and make informed choices about financial products”.
A trustee must provide a PDS to members who are beginning a pension. This is the case even for super funds that are old.
There are formal detailed rules that outline what should be in a PDS. ASIC has also issued guidelines which assist financial product issuers work out what should and should not go into a PDS.
Most SMSF trustees won’t have time to go through the legislation and other documentation. Fortunately some legal firms have created generic PDSs that can be amended for specific circumstances.
On 1 July 2012, the size of your PDS must be no more than eight pages.
Before a trustee completes a PDS, they may need to use the services of other professionals. For example, a trustee may need to value the assets of the fund to work out the market value of its assets. This will help a trustee provide accurate information to a member. You then work out what suits your personal circumstances.
A PDS must specify all the details of the pension to be paid. The PDS should also tell you what information the trustee needs to begin a pension. Ideally this information should be detailed on an application form which you complete.
Details you need to provide
The following information is necessary to begin a pension:
- The commencement date (this is the official start date of the pension; on this date the assets backing the pension begin to be taxed at 0%).
- The date of first payment (generally this date isn’t the same as the commencement date).
- Specific pension product characteristics, such as the amount of money to be used to buy the pension, the first year’s pension income, the number of pension payments per year and death benefit options, etc.
- The trustee may want a member to detail what assets should be sold to make pension payments.
To be continued next week …
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should, before acting, consider the appropriateness of the information in regards to their objectives, financial situation and needs and, if necessary, seek professional advice.