This section explains terms used in Chapter 3 and provides basic information on legal issues relating to converting to a pension account. It is recommended that Trustees verify their legal obligations carefully by reference to ASIC and ATO websites and/or consultation with a professional before proceeding with steps that may have legal implications.
Under current legislation (as at January 2018), Self-managed superannuation Fund members may convert an Accumulation Account to a Pension Account or a Transition to Retirement Account when they turn 65, OR when they reach preservation age and retire. All members converting to pension or TTR, or otherwise seeking to make withdrawals from their super account, must meet the legal conditions of release.
Conversion is at the discretion of the member and may occur at any time after age 65 or not at all. Members are entitled to retain their account in Accumulation mode until death.
Preservation age varies according to date of birth. For members born before July 1, 1960, the age is 55. For those born after July 1, 1960, but before July 1, 1964, the age is raised by one year for each year after that date. For members born after July 1, 1964, the preservation age is 60.
Note that your Preservation Age Is not the same as the legislated retirement age. Retirement age is not fixed in Australia and members can generally make their own choice as to when they retire depending on their financial circumstances. The qualifying age for an aged pension is now 65 and will gradually increase to 67 by July 2023.
Early access to superannuation funds is possible only in limited circumstances, such as if a member Is diagnosed with certain specific medical conditions or can evidence extreme financial hardship.
Members may convert to a Transition to Retirement Account (TTR) while continuing to work, provided that:
- Their Fund Trust Deed permits it, and
- At least a small balance remains in their accumulation account when commencing the TTR, and
- If under 65, they draw down a pension of between 4% and 10% of the TTR account balance each financial year and do not withdraw any lump sum, and
- If over 65, they draw a minimum amount that varies with age: 5% if you are between 65 and 74; 6% between 75 and 79, 7% between 80 and 84, 9% between 85 and 89, 11% between 90 and 94, and 14% if you are 95 or older, and
- They do not draw more than 10% of the balance in a TTR and do not draw lump sums
A TTR pension can be rolled back into a member’s superannuation account at any time.
A TTR pension can top up income for a member who has opted to reduce work hours or has had their hours cut back. The member can continue to benefit from employer contributions to build their retirement savings. These contributions can help to replace the money they draw and may even allow their total fund balance to grow while they enjoy an additional income stream over and above their wage or salary. There may be some tax benefits.
Members should seek professional advice before opting to start a TTR, including verifying social security entitlements and checking the terms of any life insurance policy their Fund may have arranged for their benefit.
Superannuation accounts may include preserved benefits, restricted non-preserved benefits, and unrestricted non-preserved benefits.
Preserved benefits include all contributions and earnings after 30 June 1999. These can only be paid after you meet a condition of release.
Restricted non-preserved benefits include all contributions between 1 July 1983 and 30 June 1999. These can also only be paid to a member who meets a condition of release.
Unrestricted non-preserved benefits can be accessed at any time, provided the rules of your fund permit.
Conditions of release are complex and wide-ranging. Some restrict the form in which benefits can be paid (for example, as an income stream or a lump sum). These are referred to as ‘cashing restrictions’.
Where a member meets a condition of release with no cashing restrictions, the preserved and restricted non-preserved benefits will become unrestricted non-preserved benefits.
Annual benefit statements should document the preserved, restricted and unrestricted non-preserved benefits in each member account.
The Conditions of Release options offered by Mclowd are:
o Members who have reached their preservation age and have fully retired are deemed to have met the conditions of release.
- Attained 65 years old
o All members over the age of 65 are deemed to have met the conditions of release, whether or not they continue to work.
- Attained preservation age
o Members who have reached their preservation age and have chosen to Transition to Retirement are deemed to have met the conditions of release
- Temporary incapacity
o Members may be able to withdraw funds in some circumstances if temporarily or permanently incapacitated
- Termination of employment
o Members who cease employment with account balances less than $200 are permitted to withdraw their funds
o Members who are temporary residents, have ceased employment, and are departing Australia permanently may be able to withdraw any balance in their superannuation account.
- Terminal medical condition
o Members who receive a confirmed diagnosis of a terminal medical condition may be permitted to withdraw their superannuation balance
In some circumstances, members may also be able to withdraw funds to relieve extreme financial hardship if the member has been receiving Australian Government income support payments continuously for 26 weeks and is unable to meet reasonable and immediate family living expenses. Permitted withdrawal is limited to one lump sum payment of between $1,000 and $10,0000 in any twelve-month period.
Members may also be deemed to meet conditions of release if they need funds on compassionate grounds to:
- Pay for medical treatment for themselves or a dependant
- Modify a home or vehicle for special needs of the member of a dependant because of a severe disability
- Make a payment on a loan to avoid losing their home
- Pay for expenses associated with a death, funeral or burial
When a member dies, if their account transfers to a beneficiary of their estate either under the terms of a Death Benefit Nomination or under their Will, the beneficiary is entitled to withdraw the entire balance of the account as a lump sum. If the beneficiary is a dependant, they may opt for an income stream. Otherwise the entire amount must be drawn as a lump sum.
Trustees should seek professional advice to ensure members meet conditions of release before making any payment or converting an accumulation account to a pension or transition to retirement account.
On the death of a superannuation pensioner, the balance in their account must be dealt with by the Fund Trustees in accordance with provisions in the Trust Deed and current law. It is important for Members to ensure they understand the legislation and have made appropriate nominations and requests, and that the Trustees correctly understand their wishes. If nominations are not legally binding, any funds remaining in your pension account at the time of your death may be allocated to a person or persons other than your desired beneficiaries.
Upon the death of a member, the balance in an account may be paid out in a lump sum, or as a reversionary pension (if you so nominated when setting up your pension and the nomination you made is legal).
A reversionary pension is one that automatically continues following the death of a member, but is paid to a nominated ‘reversionary beneficiary’. If you select Yes in the Reversionary Pensions details screen, upon your death your pension will payments will be paid to the person you nominated in that section.
Although the ATO is currently considering clarifying legislation that is unclear at this stage, legal advice suggests you should make this nomination at the time your pension commences.
You may nominate anyone who is classified as a SIS dependant (see below) to be a reversionary pensioner, but note that the nominated person must be an SIS dependant at the time of reversion, otherwise the reversion nomination becomes ineffective. In addition, if you nominate a child, the child must, at the time of your death:
- be under 18 or,
- be between 18 and 25 and still financially dependent, or
- have a severe disability
If the nominee is not a qualified person at the time of your death, the benefit will be paid in a lump sum.
If your pension does revert to another party, that person assumes ownership of the pension. That does not necessarily, however, mean that they have unfettered access to the balance, but it does mean that the balance can only then be passed to persons entitled to inherit THEIR superannuation (i.e. their own dependants or estate). That could deny your desired beneficiaries a benefit. For example, if you remarried and your children are not your wife’s children, and you nominate your wife as your reversionary beneficiary, any residual monies in your account when she dies may pass to her children instead of yours.
Your Fund’s Trust Deed can impose additional conditions on the reversionary beneficiary. However, if you nominate a reversionary beneficiary when setting up your pension in Mclowd, you should be aware of the risks attached and verify that your Fund’s Trust Deed provides for potential changes in yours and your nominated beneficiary’s circumstances.
Under law, a dependant for the purpose of receiving a superannuation death benefit is:
- A spouse or de facto spouse
- A child of the deceased (regardless of age, and including any adopted or ex-nuptial child, step-child, or child of the deceased’s spouse)
- A person who is in an interdependency relationship with the deceased (i.e. a person who has a close personal relationship and lived with the deceased, and with whom the deceased shared financial or domestic support and personal care)
DO NOT nominate a parent, brother, sister or other relative where there is no interdependent relationship to the deceased, as such nominations are invalid. Nominations made to parents, brothers or sisters or other relatives where there is no interdependent relationship are invalid.
While only dependants can receive your super as a reversionary pension, subject to the rules of your Fund, you may be able to nominate a non-dependant beneficiary to receive your super as a lump sum on your death, but it is recommended that you do so by nominating a legal professional to receive the benefit. The benefit will then be distributed in accordance with the deceased’s will.
A death benefit can also be used, in some circumstances, to establish a new pension for a beneficiary. If you answer YES to the question ”Established from Death Benefit?” you are specifying that rather than commence a new pension, you want your Trustees to simply continue paying your existing pension to your nominated reversionary beneficiary.
Nominations may include ‘’if, then’’ clauses, providing for circumstances where a nominated beneficiary passes away prior to inheriting. For example, a member may elect to allocate 100% of the benefit to their spouse, but if their spouse pre-deceases them or if they divorce their spouse, then the benefit should be distributed to their children on an equal proportionate basis.
You can make death benefit nominations binding or non-binding.
Under a binding nomination, the Trustees must pay the death benefit as nominated.
If a binding nomination is allowed, you may nominate one or more dependants or a legal representative to receive your super. Qualified dependants can receive the benefit as an income stream (reversionary pension) or as a lump sum.
Under a non-binding death benefit nomination, the Trustees have discretion to observe the wishes of the deceased member or to pay the entitlement directly to the member’s Estate for distribution in accordance with the Will.
A non-binding nomination may be more appropriate if a member:
- Has no dependants or family concerns
- Has no minor children under the age of 18 (or under 25 and still studying full time), as in these circumstances the benefit may be better managed for taxation purposes by giving professionals discretion to distribute in the most tax effective manner
- Anticipates possible changed circumstances such as a marriage breakdown or a beneficiary falling into financial difficulties.
- Fears a beneficiary may misuse money to cover personal debt or fund an undesirable habit.
It may be wiser to allow a professional discretion to distribute funds in the manner deemed most beneficial to all eligible beneficiaries.
If no nomination is made, the Trustees have discretion to distribute the funds to the Estate or to any Dependant of the deceased of their choice.
Generally, nominations expire three years after the nomination is made, however legislative changes benefiting Self-managed superannuation funds have removed this limitation and nominations by SMSF members are now binding unless revoked.
Taxation of superannuation death benefits varies according to whether or not the beneficiary is a dependant and the respective ages of the deceased (at time of death) and the beneficiary. For dependant beneficiaries, tax may also vary according to whether the benefit is claimed as a lump sum or as an income stream.