How can I top up my SMSF pension?

Prior to starting a pension from your super fund, your super is held within an accumulation account. Under the super rules, you can have just one accumulation interest held within an SMSF*.

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This restriction does not apply to pension accounts. The rules allow a fund member to have multiple pension accounts within the same super fund, a practice that is quite common for members of self-managed super funds (SMSFs).

There is, however, a restriction on adding further amounts to an existing pension once it has commenced. You can’t take contributions made after a pension has commenced and add them to that same pension account.

These contributions would need to be made to your accumulation account within your fund and then be dealt with from there.

To be clear, a contribution received after a pension has commenced cannot be added to the capital supporting that pension.

*APRA regulated funds often permit one member to hold multiple accumulation accounts

Where a fund member who is accessing a pension from their fund makes a contribution, they will need to decide what they intend to do with these contributions:

• They can leave the contribution in their accumulation account
• They can start a new, second (or third, or fourth etc.) pension from the fund, or
• They can stop (commute) their existing pension by rolling this amount back into their accumulation account and then starting a new, larger pension from their fund.

Let’s look at each of these options in more detail.

Option 1: Maintain the accumulation account

This would essentially be the ‘do nothing’ approach, with any contribution simply remaining in your accumulation account within your fund. (If you no longer have an accumulation account, you can open a new one.)

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The outcomes from this would include:

• Any fund earnings on the amounts held in the accumulation account would be included in the fund’s assessable income for the year and subject to tax.
• These earnings would be allocated to the taxable component of the member’s accumulation account.

Option 2: Commence a new pension

This approach requires the establishment of a new pension. This pension would be separate from any other existing pension that you may already be receiving from your fund.

To create this new pension, you must follow certain processes such as:

• Making a request (or an application) to your fund’s trustee to commence a new pension from the fund
• The trustees then set out a trustee resolution (or minute) to accept this request
• A pension agreement or terms are drawn up setting out the rules or terms of that pension and you should receive a product disclosure statement (PDS)
• The value of the assets supporting your new pension must be determined at its start date.

Under this approach, the minimum pension amount required each year will be based on the balance of this new pension, so you will now have multiple, separate minimum pension amounts that need to be paid each year.

As this new pension is separate to any existing pensions you may have, any earnings it generates are allocated to the new pension account according to the underlying tax components that were used to start this pension.

Option 3: Commute an existing pension and start a new larger pension

Under this approach, you would need to arrange for an existing pension to be commuted (stopped) and then rolled back into the accumulation phase of super.

These commuted pension amounts would then be mixed together with the balance held in your accumulation account from your recent contributions.

You then go through the pension establishment process to create a new, larger pension from your fund.

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This process usually includes the following:

• You make a request to the fund trustees to stop the existing pension on a certain date 
• The required minimum pension must be paid BEFORE the pension is stopped. A pro-rata approach is taken to the minimum payment if and when the pension is stopped on a day other than 1 July 
• The trustees complete a resolution to accept this request and allow the commutation
• The pension balance is then be moved back into your accumulation account where the different tax components that now make up that accumulation balance would be mixed together and recalculated
• The usual process, as set out earlier, to commence a new pension from your accumulation account must then be followed.

Other considerations

Whether you decide to start a new pension, commute an existing pension, or even maintain an accumulation account in addition to your super pension, there are fund administration issues you may want to consider, including the ease of administration in the future and any relevant estate planning issues.

Although the super rules allow you to have as many pensions as you like, you should consider how this effects the ongoing fund administration. If the additional complexity results in higher administrative expenses charged by your administration service provider, it would be a good idea to discuss this first.

Another consideration is around estate planning and how to ensure your wishes are addressed.

If you decide to commute an existing pension that was initially established as a reversionary pension so it automatically passes to your spouse, you may want to add a reversionary nomination to any new pension if you are looking for the same outcome.

Similarly, where a new accumulation account is maintained after a contribution is received you may need to add a death benefit nomination to this account.