Should you start a pension in your SMSF? Weighing up the pros and cons

For many self-managed super fund (SMSF) members, starting a pension is the point at which years of saving are converted into a regular retirement income stream. It can also be the moment when the advantages of running an SMSF are most visible. 

These advantages include greater control over the frequency of pension payments, the ability to identify certain fund assets as either pension or accumulation assets (segregation) and potential tax-free earnings on assets supporting a retirement-phase income stream.

But the move into retirement phase is not automatic, and it is not without risk.

To start a retirement-phase pension, the member must generally have met a condition of release with no cashing restrictions, such as reaching age 65 or retiring after preservation age.

Once the pension starts, trustees must ensure the fund pays at least the required minimum pension amount each financial year and maintain records to show the pension was properly established and maintained.

Whether you should commence a pension, and when, will often depend on your own personal circumstances and the overall position of your fund.

Reasons for starting a pension

Access flexible income payments

Account-based pensions generally allow members to choose their desired payment frequency and can even allow access to more than the annual minimum if needed.

For SMSF members, pension payment frequency can often be tailored to personal cash flow needs, such as weekly, monthly or annual payments, provided the arrangement is allowed under the SMSF trust deed and pension documentation.

Tax-effective retirement-phase earnings