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Beware segregated pension traps

Applying the segregated pension method for an SMSF can result in cash-flow issues caused by the division of earnings and expenses.

While the decision to segregate assets in an SMSF into pension and accumulation mode may be due to tax purposes, there are still a range of important issues to consider.

Bank accounts are usually the biggest issue with segregating an SMSF into pension and accumulation pools. If an SMSF trustee has one account, they must be able to keep track of everything since every dollar earned from every asset will go into that one bank account. However, two separate bank accounts can also be problematic. Having two accounts can make it hard to determine how you direct the right income to the right bank account.

Since dividends are paid to bank accounts, SMSF trustees may also have to provide the share registry with two accounts. This means two different broking accounts are required for shares from the same company.

Posted on 9 August '15 by , under Super.

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Transition to retirement

The transition to retirement (TTR) strategy allows you to access some of your super while you continue to work.

You are able to use the TTR strategy if you are aged 55 to 60. You can use it to supplement your income if you reduce your work hours or boost your super and save on tax while you keep working full time.

  • Starting a TTR pension: To start your TTR pension, transfer some of your super to an account-based pension. You have to keep some money in your super account so that you can continue to receive your employer's compulsory contributions as well as any voluntary contributions you may be making.
  • Government benefits and TTR: The benefits you or your partner receive might be impacted if you choose to opt for this strategy. How and what exactly will change might become clearer upon discussing this with a Financial Information Service (FIS) officer.
  • Life insurance and TTR: In some cases, the life insurance cover you have with your super may stop or reduce if you start a TTR pension – check this before making any decisions or changes.

TTR can help ease your mind as you transition into retirement but it can be a bit complex. Before you choose whether you want to use TTR to reduce work hours or save on tax, or even if you want to use TTR altogether, you should figure out how this will impact all aspects of your finances.

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