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If I have bought a number of investment properties through my SMSF during the accumulation phase, which are all or mostly paid off with net positive income by the time I reach preservation age and convert to the pension phase, can the pension income I commence be solely based on the net rental income from these properties?

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No. Disclaimer - As a US educated fellow, I needed to search a bit. I found an article 7 Common SMSF Pension Errors. It implied that there are minimum payments required each year as with our US retirement accounts. These minimums are unrelated to the assets within the account, just based on the total value. The way I read that, there would be a point where you'd have to sell a property or partial interest to be sure you have the cash to distribute each year. I also learned that unlike US rules, which permit a distribution of stock as part of a required minimum distribution, in Australia, the distribution must be in cash (or a deposited check, of course.)

  • Yes, and I see that the minimum amount starts at 4% of the member's account balance for someone under 65 and gradually increases to 14% for someone 95 or more. So one would have to slowly start selling off the assets (tax free) in order to satisfy the increasing percentage of account balance required as a minimum pension payment as one gets older. – Victor May 22 '12 at 6:01
  • It looks like the reason for increasing the % of account balance as a minimum pension payment as the retiree gets older, is to make up for the diminishing assets as they are gradually sold off to support a stable income from the pension. Thus you need a larger % of the assets as the asset value gets smaller. Ironically, if you had a number of rental properties (with no debt) in the fund, you could easily get a stable regular income that would generally increase with inflation without having to sell off any assets. – Victor May 22 '12 at 6:28
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    Yes, with US RMDs (required minimum distributions) the point is that the accounts were meant for retirement, not to encourage large estates for beneficiaries. So our minimum percents increase each year based on age. At 70, about 4%, 79, 5%, by 92, 10%, etc. Investing the account in real estate is something few do here, but I've seen people suggest it. For the situation you now observe, I see it can be an issue. – JTP - Apologise to Monica May 22 '12 at 12:35
  • "...the point is that the accounts were meant for retirement...", yes that is true for here as well, as you need to pass what is called 'The Sole Purpose Test' in order to get favourable tax treatment in the super fund. This test is basically that the main purpose of the super fund is to provide a pension for when someone reaches retirement age and retires or becomes permanently disabled and cannot work anymore. – Victor May 23 '12 at 4:40

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