An investor recently asked me how someone should go about running a super fund if you’re old enough to take a pension but still working? It’s a great question and here’s my response.

Contribution issues

Firstly, Super Guarantee contributions have to be made for all employees over the age of 18, if they earn more than $450 each month.

So if you’re employed, then there’s a high chance your employer will have to make super contributions for you.

If you want your employer to contribute to your SMSF and your employer has more than 19 employees, then after June 2015, your SMSF can only accept employer contributions via a payment gateway. Smaller employers get another 12 months before they have to use one of these gateways. This link has more details on what’s required.

Alternatively you might want to make personal contributions to your super fund. There are issues about tax deductibility of those contributions, which you will need to think carefully about. Further details are here.

Remember that personal contributions claimed as a tax deduction and all employer contributions will be taxed at 15% in the year they’re made. If you’re a high-income earner then you might also have to pay the Higher Income Earners tax, which will see you pay an additional 15% upfront tax payable on these contributions.

You need to keep in mind the various contribution caps and think carefully about exceeding these, as penalty tax applies if you keep the money in super.

Also, if you’re aged at least 65, then there are two restrictions that apply to making contributions.

One applies if you’re at least age 65 but under 75 and the other if you’ve had your 75th birthday. Under the first rule, you need to satisfy a work test before personal or non-compulsory super contributions can be made to super.

If you’re aged at least 75, then only compulsory employer contributions can be made for you. All other contributions are prohibited after 28 days after the month in which you had your 75th birthday.

Further information about super contributions can be found at this link.

Structural issues

As you’re receiving a pension from your super fund and also receiving or making super contributions, this means you will have at least two “interests” in your super fund.

Each pension you receive from your super fund is deemed to be one superannuation interest in your super fund. The contributions made to your super fund since your pension commenced are considered to be another interest in your super fund.

The point here really is that you can’t simply add the contributions that have been made since your pension commenced, to that pension. This is considered to be adding a new capital sum to the pension, which isn’t allowed. However the same effect can be achieved but it requires a five-step administration process.

Assuming the documentation governing your pension permits, you have to stop your pension, which is called commuting the pension. Before the pension is commuted, your super fund administrator will make sure that the pro-rata minimum has been paid from the pension. When the pension is commuted, the pension assets stop being taxed at 0% and return to the 15% tax part of your super fund. That is, the old pension money and the new contributions and their earnings are combined in the taxed part of your super fund. (There is some administrative work to complete to determine your Taxable and Tax-free components.)

You then commence a new pension and all your money in the fund then returns to the 0% tax rate. Obviously, the tax saving here would need to be higher than the costs of implementing these steps.

If you want all your money in the super fund to be used to pay pensions, then you could also just run more than one pension – your original pension and new ones that you commence from time to time with additional contributions. The hassle here is that you have multiple pensions, which may be unnecessary and costly.

Depending on your super fund’s trust deed, you can choose to allocate specific assets of your super fund for the payment of the pension and other assets for your non-pension accounts. Obviously income and capital gains made on the assets used to pay the pensions belongs to those pensions. If you want this, then you will have elected to use what is called “segregated pension assets”.

Running segregated assets is a more expensive option than the alternative, which is called “unsegregated pension assets” and means you simply leave the super assets as one amount of money and income and capital gains are allocated to your various member accounts using information given to you each year by an actuary. You can find out further details here.

Conclusion

As you can see, there are many issues to consider. In most cases, you won’t need to make decisions quickly and you will have time to think through the various options available to you in order to decide what is best for you.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.