“For the life of the SMSF [before this] it has been accumulating capital, money's coming in, contributions are earning. When a member moves into retirement phase, the fund has to start paying money out.”

At this point it’s important for trustees to review the fund’s investment strategy to see if it accounts for cash flow out of the fund, and whether there may enough liquid assets, such as real estate that is generating income, to not only make the minimum pension payment, but also the desired level of pension that the member wants.

“From a compliance perspective, it is important that the fund can pay the minimum pension so the member can claim exempt current pension income for the year, but it’s also important to see if the minimum pension drawdown is going to be enough or if the member wants more,” he said.

“So, you have to make sure there is enough income going to be generated from the assets of the fund to pay that pension, and that's not just when the pension commences, it’s also going to be an ongoing consideration.”

Furthermore, he said if the fund has lumpy, illiquid assets and cash is depleted over the years, it may not have enough built-up cash for the long term.

“Minimum pension payments will decide the level of pension payments, and as long as there is at least the minimum currently sitting in the fund’s bank account you can commence the pension. However, trustees may deplete that over time. And if the fund has lumpy assets this scenario may come up more than a few times a year. For example, if the rent is no longer enough to cover the increasing minimum pension requirements.”