I come across mistakes when dealing with pensions all the time. Here are just five of the common mistakes that I have come across. What is clear is that, "when dealing with Self Managed Superannuation good advice is vitally important before you start".
1. Set up documents
Documentation is important to ensure that the pension actually commences when you want it to commence. Typically, a pension may start before an actual pension payment is made. For example, sometimes the pension start date will be 1st July and the actual pension payment may be a yearly payment commencing the following June. The documentation should reflect this and include at a bare minimum such things as a request from the member to the trustee, minutes of the trustee, notification from the trustee to the member (type of pension, when to be paid, if a reversionary pension is to be applied, etc.). Your accountant or SMSF adviser should be able to help with this documentation.
2. Minimum Pension Payments
In order to take advantage of the Tax Exempt Pension Income within the fund (that is no tax on the income from the assets supporting the pension) the minimum pension amount must be paid within the financial year. This means that the pension must leave the funds bank account by the 30th June. For example, if at the 30th June $10,000 of pension payments have been made yet the minimum pension payments for the year is $11,000, the $1,000 cannot just be added to the following year's minimum.
Your accountant or SMSF advisor should supply the minimum pension amount payable each financial year. If you are receiving a Transition to Retirement Pension the maximum amount of pension payments should also be supplied.
3. Contributions
Once a pension has been started contributions cannot be made to that pension account. You can still make contributions to your SMSF; however these will be accounted for in a separate account (accumulation account). You may wish to stop the pension and add the contribution and then start a new pension. If this is the case you must first pay the minimum pension before stopping the pension. It is important that the documentation is completed to ensure that the fund maintains its tax exempt status.
If you have a pension account and accumulation account during the year (and you do not have segrated pension assets) you will need to obtain an actuarial certificate to be eligible for the tax exempt percentage of the fund income. This is not a difficult process and your accountant or SMSF advisor should be able to assist.
4. Tracking the Tax Free Component %
At the start of the pension the Tax Free Component Percentage needs to be calculated. This percentage remains for the life of the pension. This is calculated by dividing the Tax Free Component by the total starting balance of the pension. The Tax free component should be shown on your members' statement at the end of each year. It is often said to me 'I thought that the pension payments are all tax free' - yes they are, the tax free component does not refer to the regular pension payments. The Tax Free Component percentage will come into play upon death of the member and can make significant difference to the tax paid by your dependents (particular adult children).
Your members statements should detail your components. The members statements should have your tax free component percentage for pension accounts and the tax free component dollar amount for accumulation accounts. If in any doubt you should discuss with your accountant or SMSF Advisor.
5. Are you entitled to a pension
In order to commence a pension you must be over the preservation age. This means that you must have reached the preservation age at the time the pension documents says the pension starts, this does not necessarily mean at the time the first pension payment is made. For example, you may be turning 55 (and meeting your preservation age) on the 3rd of September and think that I can start the pension on the 1st of July but not pay any pension payments until after the 3rd of September and get the full year of tax free pension income. This is not possible; in order to commence the pension you have to have reached the preservation age at the 3rd of September and the documents described in 1 above must indicate this, regardless of what date the first pension payment is.
These pension rules can be a minefield to negotiate and advice from a SMSF specialist adviser is highly recommended. At MSCJ Superannuation Service we encourage our clients to remember that 'if you have any doubts as always ask before you go ahead'.
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