With a new financial year upon us, SMSF trustees in pension phase have some decisions to make about how much they draw down and from which accounts, explains Accurium's Melanie Dunn.
At the start of each new financial year self-managed superannuation fund trustees will think about how much they want to draw from their SMSF over the next year, and from what accounts those withdrawals will be made.
Meeting the minimum pension requirements
The first step in planning how to draw benefits over the coming year is to work out the minimum payment that must be paid by 30 June from each income stream to the member in order to meet the requirements of the Superannuation Industry (Supervision) Regulations (SISR) 1994.
There can be serious consequences where the minimum payment requirements are not met, for example an account-based pension (ABP) that does not meet the minimum pension standards will not be eligible to claim exempt current pension income in that year.
For an existing ABP or transition to retirement income stream, the minimum required payment in 2019-20 is a percentage of the balance of the ABP at 1 July 2019 based on the member’s age:
Minimum payment = percentage based on member age x 1 July balance
Example: Anna had $125,000 in a non-retirement phase TRIS at 1 July 2019 and was aged 61, her minimum pension requirement for 2019-20 is 4% of her 1 July balance = 0.04 x 125,000 = $5,000.
If an income stream is commenced or fully commuted during the year, then the member must pay a pro-rated minimum amount based on the number of days in the year the pension was in existence.
A partial commutation of an income stream does not lead to the minimum pension requirement being re-calculated or pro-rated.
Example: if Anna’s pension commenced 30 September 2019 on her 62nd birthday then she would have a minimum pension requirement for the year of $3,750 which must be paid by midnight 30 June 2020.
Minimum payment = 125,000 x 0.04 x 274/365 = 3,753 rounded to nearest 10 dollars.
Each individual income stream must meet the minimum pension requirements and pension payments must be ‘cashed’ and paid out of the SMSF to the member. A partial commutation of an income stream does not count towards the minimum pension payment nor does a lump sum payment.
This means an in-specie transfer – which is enacted by way of a partial commutation and lump sum payment – does not count towards the minimum pension payments. A lump sum payment or partial commutation will however raise a debit to the member’s transfer balance account and TBAR needs to be completed.
What happens to minimum requirements on death?
On the death of a member where their income stream was not automatically reversionary,T the minimum pension does not need to be paid. However, if the benefit is paid as death benefit income stream, a pro rata minimum pension payment must be paid for that income stream prior to 30 June.
Example: Consider SMSF member Sam aged 80 was being paid an account-based pension which had terms such that it would not be reversionary on his death.
He passed away on 4 August 2019. Sam’s account-based pension remains eligible for ECPI even if the minimum payment was not made prior to his death.
His wife Serena joins the fund and commences a death benefit income stream with the balance of $834,000 on 16 August. Serena was aged 78 and so she must make a payment of $43,750 prior to 30 June 2020 for her new pension to meet the pension standards.
Minimum payment = 834,000 x 0.06 x 320/366 = 43,751, rounded to nearest $10
Benefits paid as an automatically reversionary income streams must meet annual minimum pension requirements. The minimum pension is not recalculated, and the sum of payments made prior to and after the pensioner passes away count towards meeting the minimum pension.
Example: If Sam’s pension was instead automatically reversionary the minimum pension would be based on his age and balance at 1 July 2019.
Consider that his minimum pension requirement had been determined at 1 July 2019 to be $60,900 and Sam had already paid $40,000 in pension payments prior to him passing away.
In this case, Serena must make a pension payment of $20,900 by year-end to satisfy the annual minimum requirement on the original income stream that has reverted to her.
More useful information about how to meet the minimum pension standards can be found on the ATO’s webpage Pension standards for self-managed super funds.
By Melanie Dunn - Melanie Dunn is a Fellow of the Institute of Actuaries of Australia and SMSF Technical Services Manager with Accurium.
4 July 2019