Superannuation in Pension Stage:

A benefit provided by a superannuation fund to its members is taken to be a “pension” in accordance with superannuation law and qualifies for certain taxation benefits if the pension is provided by a fund whose governing rules meet the minimum standards prescribed in Superannuation Regulations. These standards set out the conditions that must be met, for example, the minimum payment amount, restriction on commutation, and so on. A consultation with an experienced Tax and Superannuation Lawyer can ensure your superannuation is accuratley managed when it is phased into pension mode.

Generally, when a superannuation is in pension made the member’s benefits may be paid by being “cashed” under the compulsory and voluntary cashing rules, rolled-over, transferred or allotted under spouse contributions-splitting provisions, cashed, rolled-over or transferred in accordance with a payment split under the family law or  paid in accordance with the Family Law Regulations. Where the trustee pays, creates, transfers or rolls over a superannuation interest in satisfaction of a non-member spouse interest on marriage breakdown. Professional and holistic legal advice from a Superannuation and Taxation Lawyer coupled with sound financial advice may be hugely beneficial to ensure the most appropriate administration of your superannuation fund in pension mode.

There are various benefits involved in having a superannuation fund in the pension mode. Firstly, once you reach retirement age, pensions from a regulated superannuation fund generally provide a tax-free income stream, whereas income derived from an investment outside the superannuation environment is taxed at the individual’s marginal tax rate. Secondly, you can take advantage of the proportioning rule which states that a member’s superannuation benefit is split between a taxable and tax free component that must be paid out in the same proportion as the taxable and tax free components of the member’s interest. The proportion of taxable and tax free components for a pension is calculated when the pension is commenced so that a pension will lock in the tax free component as a fixed percentage. In a rising market, this is very attractive as any returns on the pension’s investment will be allocated to the taxable and tax free components in the same fixed proportion as when the pension started. However, when the pension is in accumulation mode, the tax free component remains nominally static. Therefore, when the accumulation balance increases, the tax free component is diluted and the percentage is reduced. Locking in a pension sooner rather than later in a rising market is generally more tax efficient. Moreover, prior planning to maximise the tax free component by making non-concessional contributions (subject to the contribution caps) prior to starting a pension is popular for this reason.

There are certain taxation benefits available to superannuation that is in pension stage. A complying superannuation fund is entitled to an exemption for so much of its ordinary income or statutory income as is attributable to its liability in respect of superannuation income stream benefits for instance life pensions, allocated pensions, market linked pensions or account-based pensions payable by the fund at the particular time. The exemption is commonly called the “earnings tax exemption” or “exempt current pension income exemption” and does not apply to assessable contributions or non-arm’s length income of the fund, or income derived from segregated non-current pension assets. Certain areas of Superannuation Law provide an equivalent exemption for life insurance companies.  Advice from a Superannuation and Taxation Lawyer can ensure that you made aware of these benefits and positioned to take advantage of them.

Also, if you have a SMSF then receiving a lifetime, life expectancy or market linked pension from a SMSF provides trustees/members with investment control and flexibility and access to certain Centrelink concessions. There are different types of pensions which provide favorable treatment for Centrelink purposes, depending on the time they commenced. There may be certain exemptions available to lifetime and life-expectancy complying pensions as these pensions provide advantages under the income tax law which is in a constant state of flux. In addition a SMSF may commence a market-linked income stream or the commuted amount may be used to purchase a complying life time or life expectancy pension from a life insurance company. The rules govern the manner, time and extent to which the benefit must be paid and, when making benefit payments, require the trustee to have regard to death benefit nominations and any other duty that may arise in a particular case, such as giving or seeking information or restrictions under the family law. Consultation with an experienced Tax and Superannuation Lawyer can ensure that your superannuation is structure to meet all your needs, goals and expectations whilst in pension mode.

If you would like further information or wish to discuss your SMSF matter with us please do not hesitate to contact us by telephone on (02) 9233 4048 or by email to info@navado.com.au. 

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