What happens inside an SMSF in retirement

If a self-managed super fund (SMSF) has been part of your financial planning, you might wonder what actually changes in the background once retirement starts. Even if you have someone managing it for you, it’s fair to want a sense of what’s going on. The fund keeps running. The purpose shifts. The responsibilities change.

At First Financial, we specialise in SMSF management. It’s a popular choice for retirement savings that offers a level of control and flexibility that suits some more than others. We’re often asked what’s involved and how it functions in retirement, so here’s a look at the structural and operational aspects.

All superannuation funds move from the accumulation phase to pension once a member meets certain criteria and they elect to commence a pension. In an SMSF, this transition triggers a change in how the fund operates and how income is treated. It also requires documentation and clear records to show the pension has commenced in line with superannuation law.

When the pension starts, the member moves part or all of their balance into pension phase, subject to the transfer balance cap. This cap limits how much can be held in a tax-exempt pension account, is indexed periodically, and applies per individual. Amounts above the cap remain in accumulation and are taxed accordingly. This step requires asset valuation and internal accounting to reflect the split between phases.

Once in pension phase, income from assets, such as dividends or capital gains, are exempt from tax within the fund. This exemption applies only to the portion of the fund that supports a retirement income stream. To retain that status, the fund must meet minimum annual pension payments and remain compliant with all reporting and regulatory requirements.

When a pension starts, the fund needs to keep clear records of how income is generated and where it’s coming from. Payments can’t just be made without showing how they relate to the underlying assets. The accounts must reflect which parts of the fund are supporting pensions and how the earnings from those assets are treated over the year.

To manage this, the fund must adopt a method for allocating income. One option is to treat the entire fund proportionately, where income is split based on the share of pension and accumulation balances. The other is to allocate specific assets to specific accounts, which is known as segregation. Not all funds are eligible to use segregation in every case, and the rules around it can vary depending on the fund’s circumstances.

The fund does not just track what it earns. It needs to show how those earnings are linked to each phase, and that split has to be calculated properly and reflected in the accounts. The way the fund structures this can influence both reporting obligations and compliance outcomes. These settings determine how income and gains are treated inside the fund, and errors in their application can lead to incorrect reporting or tax outcomes.

Once a pension begins, the fund needs to ensure it can continue meeting those payments. This is where income generation becomes important. Earnings from sources like share dividends or rental income help the fund meet its obligations without relying entirely on selling assets. A steady and reliable income stream supports the ongoing drawdowns and helps maintain stability.

The SMSF also needs to manage liquidity, meaning its ability to access cash when needed. A fund made up of property or long-term investments may not be able to free up money quickly. Pension payments still have to be made on time and at the required minimum. That means holding enough cash, relying on regular income or being ready to sell assets when necessary. Without proper planning, payments can become difficult to meet.

SMSFs must have a written investment strategy that outlines how decisions are made and why. It needs to comply with superannuation law (known as the SIS regulations) and consider factors like cashflow, investment risk and the fund’s ability to meet its obligations. The trustee or adviser responsible for the fund will review this regularly and update it if circumstances change.

Reporting obligations continue during the pension phase. Each year, the SMSF needs to be audited and submit financial records to the ATO to it is being managed correctly and staying within the rules.

As mentioned earlier, the fund also has to pay the member a minimum pension amount each year, as set by law. This figure is based on the member’s age and is reviewed at the start of each financial year. Failing to meet this obligation can lead to the loss of tax benefits.

When it comes to estate planning, decisions made inside the fund can have a direct impact. At retirement, pension rules, beneficiary nominations and death benefit options all start to affect how super is handled following the death of a member. It’s important these settings are clearly recorded and reviewed regularly.

An SMSF doesn’t run on autopilot, especially in retirement. The shift in purpose brings changes across every part of the fund, from how income is generated to how records are kept and how tax is applied. It’s a complex system that benefits from experienced management, because getting it right takes more than just keeping up with the basics.

At First Financial, we manage every part of SMSF administration in-house. That includes financial statements, tax returns, compliance records, investment strategy support and coordination with the ATO. We understand that most people don’t have the time or expertise to manage an SMSF themselves, which is why our service is comprehensive.

If you’d like to learn more about SMSFs and whether one could suit your broader financial and retirement plans, contact our team today.

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