While we never thought we would live to see the day where the early release of Super is sanctioned, SMSF members in the retirement phase have not been forgotten as the Government throws them a pension lifeline.
Coming to terms with how pension payments work in a COVID-19 world is yet another example of how adapting to SMSF change is quickly becoming the new normal.
Here’s the important stuff.
Has the Minimum Pension Amount Changed?
Account-based pension balances have been badly affected by the losses in the financial market because of the COVID-19 crisis.
To assist retirees, the government has reduced the minimum annual payment required for account-based pensions and annuities, allocated pensions and annuities and market-linked pensions and annuities by 50% in the 2019–20 and the 2020–21 financial years.
The 50% reduction is based on the pension account balance at 1 July 2019 for the 2019–20 financial year. The table below shows the minimum percentage factor for each age group required to be paid.
|Age||Minimum % withdrawal for the 2008–09, 2009–10 and 2010–11 income years for certain pensions and annuities||Minimum % withdrawal for the 2011–12 and 2012–13 income years for certain pensions and annuities||Minimum % withdrawal (in all other cases)||Reduced rates by 50% for the 2019-20 and 2020-21 income years (%)|
|95 or more||7%||10.5%||14%||7%|
What Happens if More Than the Reduced Minimum Has Been Paid?
Once the newly reduced minimum has been paid from an account-based pension, no further payments are required. If a member does not want to receive any further pension payments, they can cease being paid the pension for the remainder of the year.
From an audit perspective, once the minimum has been paid there are no further requests for documentation.
SMSF trustees should be aware, however, that the ATO has stated it is best practice that they consider the fund’s trust deed and document any changes and the reason for the change. This could be recorded in a minute or other contemporaneous document.
Can Amounts Paid Over the Minimum Be Considered a Lump Sum?
Unfortunately, pension payments already paid and received by an SMSF member cannot be re-categorised.
As a result, where payments made from an account-based pension in excess of the new reduced minimum annual payment required for the 2019–20 financial year are pension payments (that is, superannuation income stream benefits) for the year and cannot be re-classified as superannuation lump sums.
Does the Reduced Payment also apply to Market Linked Pensions?
Yes, the reduction in the superannuation minimum annual payment requirements also applies to market linked pensions (also referred to as term allocated pensions or TAPs).
Market linked pensions have a minimum and maximum payment limit, and the actual pension payment drawn for the year must be within these limits.
The minimum payment limit, which is normally 90% of the pension amount that is worked out under a formula, has been reduced to 45% for the 2019–20 and 2020–21 financial years as part of the government’s temporary reduction of superannuation minimum payment amounts.
Can Pension Payments Be Further Reduced if the SMSF Has an Unrealised Capital Loss?
The changes only provide for a halving of the minimum annual payment requirement as applicable to the pension account balance at:
- 1 July 2019 (or a later commencement date during the year) for the 2019–20 year
- 1 July 2020 (or a later commencement date during the year) for the 2020–21 year.
Regardless of losses incurred, the pension cannot be recalculated based on a lower account balance of the fund at another point in time.
Can a Member Put the Amount Above the Reduced Minimum Annual Payment Back into the SMSF?
An SMSF member can put the amount back into the fund as a superannuation contribution if they are eligible to make superannuation contributions, subject to any other rules or limits such as contributions caps.
Case Study 1: Temporarily Reducing Superannuation Minimum Payment Amounts
Robert is 67 years of age. At 1 July 2019, Robert’s account based pension balance was $480,000. Robert’s minimum annual payment was calculated at 5% (the percentage applicable to his age) of his pension balance, which is $24,000. Following the law change, Robert’s required annual minimum pension payment for 2019–20 is $12,000.
If Robert has already withdrawn more than $12,000 for 2019–20, he is not able to put the amount above $12,000 back into his superannuation account unless he’s eligible to make superannuation contributions and subject to any other rules or limits such as contribution caps.
Case Study 2: Superannuation Pensions and Annuities that have already Commenced
For pensions and annuities that commence part-way during the 2019-20 or the 2020-21 financial year, the 50% reduction applies to the minimum annual payment that is calculated proportionally on the account balance on commencement day.
Thomas commences an account-based pension on 1 January 2020 at age 66. His pension account balance on the commencement day is $250,000. Under current minimum drawdown requirements, the minimum annual payment amount would be $12,500 (5% of $250,000). As the pension commenced on 1 January 2020, the required minimum amount is calculated proportionately from the commencement day to the end of the financial year:
$12,500 (minimum annual payment amount) × 182 (days remaining) ÷ 366 (2020 is a leap year) = $6,215.
Following the temporary reduction in minimum drawdown requirements, Thomas is only required to drawdown 2.5% of his account balance, which is $3,107 ($3,110 rounded up to the nearest 10 whole dollars). If Thomas has already withdrawn over $3,110 for 2019-20, he cannot put the amount above $3,110 back into his superannuation account unless he’s eligible to make superannuation contributions and subject to any other rules or limits such as contribution caps.
Note: These withdrawal factors are indicative only. To determine the precise minimum annual payment (especially for market linked income streams), refer to the pro-rating, rounding and other rules in the Superannuation Industry (Supervision) Regulations 1994.