As announced prior to the release of the budget and re-affirmed in the budget, the 50% reduction of the minimum pension has been extended to the 2022-23 income year: Retiree’s, accountants and advisers will need to note that:
- The extension is subject to the relevant legislative instrument being tabled to amend the SIS regulations, hopefully this occurs prior to Parliament being dissolved for the upcoming Federal Election;
- It only applies to account based pensions, transition to retirement pensions and market linked pensions;
- There is no reduction to the maximum pension amount for a transition to retirement pension or market linked pension;
- The extension of the minimum pension reduction also extends the strategy of treating any amounts drawn in excess of the reduced minimum as a partial commutation. The partial commutation will be a debit to the pension recipient’s transfer balance account (TBA) and create transfer balance cap space. It should, however, be noted that the fund will be required to prepare and lodge the relevant transfer balance account report (TBAR) for any partial commutation. The frequency of lodgement of a TBAR will depend upon whether the SMSF is an annual or quarterly TBA reporter;
- Those being paid an old lifetime or life expectancy defined benefit pension have again been provided with no relief to deal with volatile investment markets. They still wait for the legislation following last year’s Federal Budget to provide flexibility and the option to exit these pensions, which would allow them to commence the more flexible account based pension.
Whilst the announcement of the extension of the reduction to the minimum pension to 2022-23 has been widely welcomed, it has to be asked how this fits within the retirement income covenant. One of the key aims of the retirement income covenant is to encourage retirees to feel comfortable spending their capital. This measure encourages the opposite. While it doesn’t apply to SMSFs, the minimum pension standards applies equally to APRA funds.