Can You Start an SMSF Pension Using Only Part of Your Accumulation Balance?

Yes.

An SMSF member can commence an account-based pension using part of their accumulation balance while leaving the remaining balance in accumulation phase.

Before the pension starts, the fund’s assets should be valued at market value as at the pension commencement date. This ensures the member’s balance is accurately determined and the pension is established correctly.

What Happens to the Taxable and Tax-Free Components?

When a pension commences, the tax-free and taxable components of the member’s superannuation interest are calculated based on the proportions that exist at that time.

For example, if a member’s accumulation account consists of:

• 30% tax-free component; and
• 70% taxable component,

then any pension commenced from that account will generally retain those same proportions.

Importantly, a member cannot choose to transfer only the tax-free component into pension phase while leaving the taxable component behind. The proportioning rules apply automatically.

Can a 100% Tax-Free Pension Be Established?

Potentially, but only where the pension is commenced entirely from a tax-free superannuation interest.

Where an existing accumulation account already contains taxable and tax-free components, the proportioning rules will generally prevent the creation of a 100% tax-free pension from that mixed interest.

In some circumstances, members may consider:

1. Commencing a pension using their existing accumulation balance; and
2. Making non-concessional contributions and commencing a separate pension using those amounts.

Whether this strategy is appropriate depends on the member’s circumstances and contribution eligibility.

How iCare SMSF Can Help

At iCare SMSF, we assist trustees with:

• Asset valuations for pension commencement;
• Establishing account-based pensions;
• Calculating taxable and tax-free proportions;
• Transfer balance account reporting; and
• Ongoing SMSF compliance.

If you are considering starting an SMSF pension, contact iCare SMSF to discuss the most appropriate structure for your circumstances.

Disclaimer

This article contains general information only and does not constitute financial, taxation or legal advice. The taxation treatment of superannuation pensions depends on individual circumstances and may change with future legislation. Professional advice should be obtained before implementing any pension strategy.