How to Benefit Out Of Commencing Your Pension in SMSF


For those who have retired or hit the age of 55, there are several benefits of commencing an account pension or transiting to income retirement in your SMSF (self-managed super funds). Commencing a pension isn’t a difficult task, thanks to the transparency and control associated with SMSF. As long as you are eligible, commencing a pension will ensure that you make the most out of it. Here are the benefits of commencing a pension in SMSF.

SMSF pays less tax

At the accumulation phase of the SMSF, the income and a lot of capital gains are often taxed at 15 percent and 10 percent respectively. When the SMSF is 100 percent in the pension phase, both capital gains and income are fully tax free, making an SMSF the best vehicle in building and maintaining retirement savings.

 Concessional taxed income is accessible

In contrast to other incomes like wages or salary, pension income gets better tax treatment based on the age and tax components within the pension account. Getting a pension income from the SMSF may be a tax-effective method of supplementing reduced wages resulting from retirement or it may increase the capacity of salary sacrifice extra contributions to super.

Growth of ‘Tax free’ benefits

Maximizing your SMSF ‘tax free’ benefits can be beneficial because of the ability to withdraw these benefits from the super fund completely tax free when under 60 years of age. On the same note, your adult children may inherit the benefits without paying any tax to the death benefits.
Starting a pension on tax-free benefits is one of the best ways to grow them. At the accumulation phase of the SMSF, every investment earning becomes part of a ‘taxable’ component. On the other hand, when the SMSF goes to the pension phase, the fund earnings are often added to every member’s account equal to the ‘tax free’ and ‘taxable’ components of the specific pension interest. Hence, when one commences a pension on these benefits after non-concessional or tax contributions, they can ensure that every future earning with regard to the benefits also become part of their ‘tax free’ component. Such proportional treatment of income while in the pension phase can promote the tax free benefits of a member over time.

Maximize the effectiveness of withdrawal tax

If one makes an after-tax or a non-concessional contribution to their SMSF and starts a pension immediately, they can usually isolate the ‘tax free’ benefits from some other ‘taxable’ fund monies. Separating pension interests can optimize flexibility in the future so that one can make withdrawals in a tax effective way.
For instance, if one is below 60 years of age and wish to get additional money from the SMSF, they can take the money from their tax free pension without paying any tax. Those who are above 60 can draw the extra cash from their taxable pension, tax free, and preserve all the tax free benefits they may have.
Despite all these benefits, people who don’t need extra cash are still reluctant to commence a pension. However, such people can just contribute the money back into their SMSF.

Post written is part by Biljana who is a blogger and a writer researching the best ways for one to become financially secure at old age through SMSFs.