How To Start A Super Pension: A Step-by-step Guide

Choosing when to start a pension can have a more meaningful impact than you might expect. On a positive note, opening a pension means access to tax-free investment earnings and withdrawals for most people. However, holding off could make sense if there is a pending increase to the transfer balance cap or if starting a pension would affect Centrelink entitlements for you or your partner.

Step 2: Choose your preferred pension type or combination

There are a range of pension products available with different features.

A simple account-based pension offers the option to choose your investments, set the amount of your regular payments (subject to minimum requirements) and withdraw lump sums as needed. Flexibility is a plus, but there’s no guarantee your balance won’t run out.

Lifetime pensions provide income for life and investing in one may increase your Age Pension. Some include the option to choose your investments and set your regular withdrawals within limits, but access to lump sum withdrawals is very limited.

Do your research to discover the type of pension that suits you and the features you would like included. You don’t have to pick one or the other. A lifetime pension and a simple account-based pension can work together.

At this stage, you don’t need to pick a specific product.

Step 3: Consider a recontribution strategy

In this step, you should choose whether you will use a recontribution strategy, and whether to put it in place before or after starting your first pension.

A recontribution strategy involves making a lump sum withdrawal from your super and using that money to contribute either to your or your partner’s account. It can be useful in a few situations:

• Reducing tax for your future beneficiaries
• Sharing your balance with your spouse to keep both of you below the transfer balance cap or the threshold for Division 296 tax on investment earnings
• Moving money to the account of the partner who is younger than 67 to improve the older partner’s Age Pension.

Many people complete a recontribution strategy before starting a pension because pension accounts can’t accept contributions and some types of pensions don’t offer the option to easily make lump sum withdrawals. However, if you will be using a simple account-based pension, you may instead start your pension, withdraw a lump sum from it and then contribute to a new super account in the accumulation phase. The new account could then be used to start a second pension.

Step 4: Submit any outstanding notice of intent to claim a tax deduction for super contributions

If you have made personal super contributions you intend to claim as a tax deduction, you must give the relevant notice to your super fund and confirm they have accepted it before starting a pension or rolling over your balance to a new super fund.

Missing this step means you lose the opportunity to claim your tax deduction, and your super fund and the Australian Taxation Office (ATO) will treat the contribution as a non-concessional (after-tax) amount.

Step 5: Decide if you need to keep an accumulation account

Pensions can’t accept contributions and don’t offer insurance for death, permanent disability or income protection. If you will continue to make contributions after starting your pension, or you want insurance, you will need to keep an accumulation account open. That can be your current account, or you can join a new super fund and leave a balance there.

Remember that closing a super account means the insurance cover attached to it will be cancelled and you may not be eligible for cover with a new provider. Most super funds don’t offer insurance after you turn 65.

You can open an accumulation account at any time. If you don’t need one immediately after starting your pension, you may still choose to open a new account to contribute to in the future.

You can set up a super pension account with your current super fund or a different fund. The choice is yours.

Step 6: Choose your pension product(s)

Now you know the type of pension you’re looking for (simple account-based, lifetime or a mix of both) and the features you want. It’s time to choose the product(s) you will invest in.

Check fees, past performance and the range of investment options (if applicable), member services and whether you will qualify for a retirement bonus. If you’re looking into lifetime pensions, contact each fund you’re considering or use their online tools to estimate the amount of income each product would give you.

Step 7: Join your chosen super fund

If you’ve decided to start a pension with your current super fund, you can skip this step. Move on to step 8.

Before applying to start a pension, you will usually need to have an accumulation account with the super fund that offers the pension you will be using. You can apply to open an account online, but there should also be a paper form available if you prefer.

Step 8: Make your withdrawal and recontribution (if applicable)

If you chose to use a recontribution strategy in step 3, you can make your withdrawal and send your contribution now. If you’re using a multi-stage strategy, you will need to make further withdrawals and contributions (and start more pensions) in future.

Remember the importance of using a separate account for your contribution if you’re using a multi-stage strategy.

An alternative if you will be using only simple account-based pensions is to put off your withdrawal and contribution until after your pension has started. Then you may use the new accumulation account created by your contribution to start a second pension that includes a 100% tax-free component.

Step 9: Consolidate the balances you will use for your pension, or keep them separate to start multiple pensions

If the money you want to use for a pension is currently in more than one super fund, you will need to combine your accounts into one. You can roll over from one account to another using myGov.

Before going ahead, consider that the tax components of your accounts will mix when they are combined. If one account holds a higher proportion of tax-free component than the other, mixing can make a strategy to reduce tax for future beneficiaries less effective.

See the multi-stage recontribution strategy (linked above, in step 8) and our dual pension strategy case study to understand more.

If you have deliberately created a separate account to hold your tax-free component during your recontribution strategy in step 8, then you will not combine your accounts in this step. Instead, you may use your two separate accounts to open two pensions in the next step.

Similarly, if you have chosen more than one pension provider, you will need to transfer the money you want to use for each product into the super funds that you will be using.

Step 10: Apply

Now you’ve done the preparation work, it’s time to move on to complete your application(s) to open the pension(s) you have chosen.

For simple account-based pensions, you will need to select the amount and frequency of your regular payment and choose investment option(s) for your balance and payments. For example, you might choose to invest 80% of your opening balance into the growth option and 20% in the cash option, with pension payments drawn from the cash part. This approach is often called a bucket strategy.

A lifetime pension may not offer investment choice, and the payment amount may be set by the provider, but you can often choose the frequency. If you do have more investment and payment options, you will be able to select them in your application. You may also need to get a quote showing the promised income before you apply.

All applications will request details of your chosen beneficiary. You can nominate someone to receive a lump sum or choose that your pension should continue to be paid to a new recipient. A pension that continues after your death is a reversionary pension, and there are restrictions on who you can nominate to receive one.

When you nominate someone to receive a lump sum, the nomination can be binding or non-binding on the super fund. If you make a binding nomination, the fund’s trustee must follow it if it is valid and has not expired. With a non-binding nomination, the fund’s trustee decides who will receive your benefit.

Step 11: Notify Centrelink

If you are already receiving a payment from Centrelink, such as the Age Pension, you need to let them know of the change in your circumstances within 14 days.

If you will be applying for a payment now or in future, you can include the details of your new pension(s) in your application.

Step 12: Future maintenance

Now that your pension is in place, or you have created multiple pensions, the work moves to keeping track of your progress and making any required changes, where you can.

Follow any multi-stage recontribution strategy you decided on to make another withdrawal and recontribution at the right time.

If you do make contributions, consider when and if you would like to use your new contributions to start another pension. Alternatively, you might close your current pension to combine your account balances and start a new, larger pension. This option is only available for simple account-based pensions.

If you have a pension that offers an investment choice, you will need to monitor your changing attitude to risk and investment horizon and switch investments as needed. A bucket strategy for investing your pension will need regular maintenance to top up the short-term bucket.

Keep track of your income and expenses and adjust the payments from your super pension as needed, if it has flexible payments.

Change your beneficiary nomination if your circumstances change.

If you have a simple account-based pension, remember that this type of pension can be transferred to a new fund at any time. If you’re not happy with performance, fees or services, vote with your feet.