Lump sum and income stream (pension)

An SMSF can pay benefits in the form of a lump sum, an income stream or a combination of both, provided the payment is allowed under super law and the fund's trust deed.

Lump Sum

If your fund allows it, you may be able to pay a member all or some of their super benefit as a single payment. This payment is called a 'lump sum'.

The member may be able to access their super benefit in several lump sums. However, if the members asks to set up a regular payment from the SMSF it may be an income stream (pension).

As a trustee, you need to work out the taxable and tax-free components of the member's super benefit and how much (if any) tax to withhold.

Income stream (pension)

Your Self Manage Super Fund (SMSF) can pay benefits to a member as an income stream (pension) if the member has met one of the conditions of release.

Standards for Income Streams

An income stream is a series of periodic benefit payments to a member. Income streams from an SMSF are usually account-based, which means they are related to the member's fund account.

An income stream is a pension if the payments occur at least annually and, for an account-based pension, a minimum amount is paid to the member each year.

If these standards are not met in a financial year, the income stream ceases for income tax purposes and we consider the SMSF has not paid an income stream at any time during the year.

Transition to retirement account-based income streams need to meet the same standards as ordinary account-based income streams. Additionally, there is a maximum annual payment limit of 10% of the account balance. These income streams can only be commuted to a lump sum in limited circumstances.

Income streams started before 1 July 2007, which complied with the rules applicable at the time, are deemed to satisfy the new requirements and may continue to be paid under the former rules.

Minimum Payments

You must make payments at least annually and meet the minimum pension payment amounts. The minimum pension payment amount is a set percentage of the member's account balance at commencement or at 1 July for every subsequent year. The percentage varies according to the member's age and the year the pension is paid.

To ensure the pension standards are met, you need to consider the time a member’s benefit is cashed. As a general rule, a benefit is cashed when the member receives an amount and the member’s benefits in the SMSF are reduced. 

Managing Assets that Support a Pension

Once the pension has started:

  • You may be able to claim a tax exemption in the SMSF annual return for certain income earned from assets held to provide for super income stream benefits. This is called exempt current pension income (ECPI).
  • Note: From 1 July 2017, earnings from assets supporting a transition to retirement income stream (TRIS) will not be eligible for ECPI in any circumstances and will be taxed at 15%. This will apply to all TRIS regardless of the date the TRIS commenced.
  • You can't increase the capital supporting the pension using contributions or rollover amounts.
  • You can't use the capital value of the pension or the income from it as security for borrowing.
  • Before you can commute a pension (for example, into a lump sum), you must pay a minimum amount in certain circumstances. 


Ending a Pension

The most common circumstances for a pension ceasing are:

  • The pension capital is exhausted
  • Failure to meet the super pension standards
  • The pension is fully commuted to a lump sum
  • The member dies (but the pension may continue if a dependent beneficiary is automatically entitled to a reversionary pension).