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Moving from accumulation to the pension phase

The pension phase of your self-managed super fund (SMSF) is a significant milestone in your retirement journey — it’s when you shift from growing your retirement savings to accessing them as an income. 

Once you meet the eligibility criteria, such as reaching the preservation age or satisfying a condition of release like retirement, you can begin withdrawing from your super.

However, this transition also affects how your fund is taxed and managed, so you must notify the ATO. You’ll usually need to report details such as your SMSF transfer balance.

Understanding the transfer balance cap

  • The transfer balance cap ($1.9 million as of 2024) limits how much super can be transferred into the pension phase of your SMSF. 

  • Exceeding this cap means the excess must be withdrawn or returned to the accumulation phase, where it will be taxed at the standard rate.

What to consider in the pension phase

As you approach and enter retirement, it’s a good idea to review your goals and objectives as these may differ between your working years and retirement.

Importantly, when moving from the accumulation phase to the pension phase within an SMSF, you need to ensure you have the right SMSF investment strategy in place to meet those goals and objectives.

You can have up to six members within your SMSF, and not all of them may be in pension phase, so you may need to have different investment strategies within the SMSF.

With the right strategy, your investments can continue to grow, even once you start drawing an income from your super. 

 

Once in the pension phase, your SMSF must make regular pension payments, with minimum withdrawal amounts set by the government.

It’s important to note that:

  • As not all members may be in pension phase you’ll need to segregate or proportion the SMSF balance to each individual member.
  • The minimum amount payable is calculated as a percentage of the pension balance attributed to the retired member at the start of each financial year.
  • You may need to sell investments to ensure you have enough money available to make the required pension payments.

A big benefit of the pension phase of superannuation is the tax-exempt status. This status applies whether you are in a traditional super fund or an SMSF.

While in the pension phase it is important to note that: 

  • You can only transfer $1.9 million per member to the pension phase, anything over remains in accumulation phase or must be withdrawn.
  • Pension payments made to eligible members are tax-free.
  • Investment earnings are generally tax-free.
  • If you have multiple members in your SMSF you will need to segregate or proportion the balance of the SMSF to ensure that the tax-free status on investment earnings is only applied to the pension balance for eligible members.
  • Your SMSF will be included in the Age Pension eligibility assessment and must be reported to Centrelink.

Managing an SMSF can be challenging and time consuming, and this gets more complicated in retirement with the potential need to sell investments to fund your retirement income or segregate investment assets across multiple beneficiaries. Many people consider changing to a traditional super fund once they retire to reduce their administrative burden and allow them to focus on their retirement.

An industry super fund, like Equip Super, offers a variety of investment options, with much less administration.

Transfer from an SMSF to an industry fund

Managing an SMSF offers control and flexibility, but it also comes with responsibilities that can become more challenging in retirement. 

It’s why many people choose to transfer some, or all, of their SMSF savings to an industry super fund like Equip Super when they get to the pension phase.

  • Equip Super can handle the administrative work, ensuring compliance with regulations and managing investments. 
  • It’s a convenient option if you’d rather focus on enjoying retirement without the burden of running an SMSF.

To reduce their administrative burden and ensure regular pension payments, some SMSF owners choose to transfer the pension phase portion of their SMSF to Equip Super, while retaining the accumulation phase portion within their SMSF. This works particularly well for SMSF’s which have multiple beneficiaries across different phases.

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