SMSF pension phase refers to the mode that some or all of your superannuation savings are held in.
There are two phases within a self managed superannuation fund (SMSF) (or any superannuation fund for that matter). These two phases are ‘pension phase’ and ‘accumulation phase’.
Accumulation phase is where contributions are made to your account, such as mandatory employer SG contributions, salary sacrifice contributions, self-employed contributions and after-tax contributions.
SMSF Pension Phase & Accumulation Phase: Tax
Your superannuation retirement savings will be invested whether in pension phase or accumulation phase.
All earnings, including capital gains, received from investments within your account have a tax rate of up to 15% in accumulation phase. Specifically, all income (including Concessional Contributions) received by your superannuation account will be taxed at 15% (plus an additional 15% for high income earners) and all capital gains will be taxed at 15%, reduced by 33% (effectively 10% tax), if the asset sold was owned by the SMSF for longer than 12 months.
In pension phase, all earnings received from assets supporting your pension income stream will be received tax free (0% tax). However, as of 1 July 2017, due to the changes in superannuation rules, transition to retirement pensions will be taxed in the same manner as earnings received within an accumulation account (i.e. up to 15%).
SMSF Pension Phase: Minimum Withdrawal
When your funds are in accumulation phase, there is no requirement for you to draw an income. In fact, you are unable to access your superannuation savings at all until you have met a superannuation condition of release.
If you have met a superannuation condition of release, you do not need to start a pension income stream. Your savings can remain in accumulation phase and you should be able to make lump sum withdrawals from your account.
However, when your account is in pension phase, you are required to received a minimum pension payment. The minimum pension payment is based on your age and account balance. A percentage factor is applied to your account balance to determine the annual income that must be withdrawn each year, as follows:
|Age||Pension Payment Factor|
|65 – 74||5%|
|75 – 79||6%|
|80 – 84||7%|
|85 – 89||9%|
|90 – 94||11%|
|95 or older||14%|
SMSF Assets: Segregated vs Unsegregated
Sometimes, but not often, the assets or investments held within SMSF pension phase and SMSF accumulation phase are segregated from one another. For example, certain assets will be considered assets supporting the pension/s, while other assets will be considered assets supporting the accumulation phase balance/s.
The reason for doing this is because: 1. members of the SMSF are at different stages and therefore different assets and risk appetites will apply, or 2. different assets may be suited to different tax applications.
Let’s expand on each of these points.
1. Member’s are different ages.
Consider a SMSF where a mother and son are the members. The mother is 65 and the son, 35.
The mother is at a point where she is about to begin drawing down on her retirement savings to support herself throughout retirement and would like to preserve capital. Therefore, a higher degree of defensive assets such as cash and fixed interest might be appropriate, with a smaller allocation to growth-orientated assets such as shares and property investments (say 70% defensive / 30% growth assets).
The son is in a well paid job, accumulating wealth in superannuation through employer contributions and a bit of salary sacrificing. It’s 30 years before he can access his superannuation savings. Therefore, he is comfortable allocating more of his superannuation to growth assets, because his investment time horizon is longer and he has time to ‘ride out’ investment cycles. Therefore, a higher degree of growth assets such as shares and property might be appropriate, with a smaller allocation to cash and fixed interest based investments (say 30% defensive / 70% growth assets).
Rather than pooling all of the assets of the SMSF together, the mother and the son could segregate the assets of the SMSF, so that particular assets support the mother’s balance and other assets support the son’s.
Had it been a husband and wife, as opposed to a mother and son; maybe a pooled SMSF investment strategy would be more appropriate, as both members would presumably be a similar life stages.
2. Different tax applications
For explanation of why assets might be segregated in SMSF pension phase and accumulation phase for tax purposes, let’s assume the SMSF is a single member fund, the member of the Fund is Robert and he is 61. Let’s also assume that Robert has recently retired with a SMSF balance of $2 million.
Due to the new rules from 1 July 2017 and the application of the Transfer Balance Cap, only $1.6 million can be used to commence an income stream, leaving the remaining $400,000 in SMSF accumulation phase. If he had an existing SMSF pension balance priot to 1 July 2017, he would need to rollback the excess pension balance above $1.6 million to accumulation phase to avoid incurring Excess Transfer Balance Cap Tax on notional earnings.
Tax on earnings within SMSF accumulation phase is 15%, including capital gains. However capital gains tax (CGT) is reduced to 10% if the asset sold was owned for longer than 12 months. In SMSF Pension Phase, tax is 0%. Therefore, it may be beneficial to use a segregated asset approach. For example, income producing defensive assets, such as cash and fixed interest, could be held in SMSF pension phase, so that the income is received tax free; whereas growth-orientated assets can be held in SMSF accumulation phase, as they generally produce lower income and therefore do not incur as much tax each year.
Hopefully this article has given you a greater understanding of the difference between SMSF Pension Phase and SMSF Accumulation Phase.