Pension Payment Agreements for SMSF Members: Do I Need One and What are the Benefits?

Pension Payment Agreements (PPA) play an important role in SMSF administration. When a member becomes entitled to payment of a retirement benefit from their SMSF, they may choose to receive this payment in a lump sum or in the form of a pension, which is a regular payment of income from the SMSF.

For SMSF members who choose to put pension arrangements in place, adopting a formal PPA represents best practice for SMSF governance and administration. By setting out formal rules for how pension payments are made, PPAs provide a greater degree of legal certainty, ensure pensions are set up correctly and facilitate efficient and co-ordinated estate planning.

What are SMSF pensions?

SMSF pensions are a form of regular income received for SMSF members. There are two main types of pensions in the SMSF context: simple accounts-based pensions and transition to retirement (TRIS) pensions. An accounts-based pension is a regular income stream paid from an individual's superannuation account (generally after they have retired), while a TRIS pension is largely the same but allows individuals to receive a limited regular income stream from their superannuation account while still working. Both types of pensions provide a flexible and tax-effective way for SMSF members to receive income when retired, or when transitioning to retirement.

What is a PPA and what is its purpose?

A PPA is a document that governs the terms of a SMSF pension. While pension arrangements can be set up by the member submitting an application form and having the SMSF trustee approve it by resolution/minutes, a PPA provides a more extensive and comprehensive set of governing rules for the pension.

The PPA outlines the payment terms, including the amount and frequency of payments (and how they can easily be changed), as well as any conditions that must be met before payments can commence. It also outlines the processes and rules for commutation of the pension, converting the pension into a lump sum, if desired and the rules for what will happen to the pension if the member dies.

What are the benefits of having a PPA in place?

Having a PPA in place has numerous advantages for SMSF members, but it is in the area of estate planning that a PPA has the most value.

Retirement and estate-planning advantages

The average age of SMSF members is inevitably rising, and in the near future the efficacy of members’ estate planning will soon come into full view.

Automatically reverting pensions – it is advantageous for pension documents to identify to whom a pension will automatically revert on a pensioner’s death. The reasons include:

• From the perspective of transfer balance accounts, it allows an additional period of up to 12 months for the SMSF and survivor to determine if any pensions (either of the deceased, or of the survivor) need to be commuted to comply with the survivor’s transfer balance cap: this extends the advantageous tax treatment of the pensions until that commutation occurs.
• The pension documents are the best means to set out whether or not the pension ‘automatically reverts’ – if the issue is left to the discretion of the trustee, then the transfer balance account advantage above will not apply. Additionally, those tax advantages may be lost if the documents are unclear in any way.
• Often pension documents do not clearly identify the automatic reversion – whereas the Cleardocs PPA allows customers to address this.
• The assets which are the subject of an automatic reversion remain in the superannuation system, and in turn this means that those assets do not become the subject of a dispute which arises about the personal estate of the deceased. Again, this is a very important matter which should be dealt with in a properly drafted PPA rather than a set of pension minutes.

Estate planning – a number of documents determine what happens to a member’s super assets when they die. It is essential that these documents are prepared in contemplation of each other, and that they correctly reflect the member’s wishes.

• Documents which may determine what happens to a member’s super assets include the PPA or pension minutes, the SMSF’s trust deed, a death benefit agreement, a binding death benefit nomination and a non-binding death benefit nomination.
• Those documents can:
  • Require that a pension automatically revert to a survivor, and continue to be paid as a pension;
  • Require that one pension automatically revert, while the other be paid as a lump sum to a super law dependent;
  • Require that the balance of the pension account be dealt with in accordance with another fund document (such as a death benefit agreement or binding death benefit nomination);
  • Require super benefits to be paid to super law dependents;
  • Require super benefits to be paid to the deceased’s legal personal representative, to be dealt with under the deceased’s will.
• None of these options can sensibly be explored without being absolutely clear about the member’s wishes, and ensuring those wishes are correctly recorded in the relevant document.
• The advantage of a PPA is that it explicitly deals with whether or not a pension is to automatically revert, as well as what happens to the pension account if there is no survivor.
• To take full advantage of the clarity a PPA provides, the PPA should be drafted alongside the SMSF trust deed and death benefit documents and, to the extent necessary, the member’s will.

Advantages in general

Legal Certainty – A PPA provides a legally binding agreement between the member and the SMSF trustee, reducing the risk of disputes and ensuring that the terms of the pension are clear and enforceable. A PPA expressly provides that only the trustee(s) and member need to agree if it is to be amended, and there are changes which can be made which are at the discretion of the member acting unilaterally.

Clarity – A PPA outlines the terms of the pension and its commutation or nomination, providing clarity for the member, the SMSF trustee, and the member's beneficiaries. This can help to avoid misunderstandings and ensure that the pension is paid and managed according to the member's wishes.

How does the Cleardocs PPA work?

Cleardocs offers a SMSF Pension Pack, which is a simple and cost-effective way for SMSF members or their advisors to prepare a PPA. The SMSF Pension Pack provides a comprehensive set of legal documents and guides, making it simple for you or your advisor to set up a PPA. The SMSF Pension Pack allows you to choose what type of pensions you receive (accounts-based pension or TRIS), choose when and how the member receives the pension and how the parties make changes later, and how the parties may commute the pension in certain circumstances and nominate a revisionary beneficiary to receive the pension.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial Practice Group.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of matters.

Order related document packages

SMSF Pension Pack

SMSF Pension Commutation