At the start of each new financial year self-managed superannuation fund (SMSF) trustees will re-calculate the minimum pension payment requirements for each income stream in their SMSF. Trustees may also desire to draw from their SMSF an amount higher than the minimum requirements over the coming year. It is important for trustees to therefore consider how and when they draw an income from the SMSF to ensure the minimum pension standards are met, transfer balance account reporting (TBAR) requirements are met, and tax efficiencies are considered.
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 (TRIS) 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 = % 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. Her 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 a TBAR needs to be completed.
What happens to minimum payment requirements on death
On the death of a member where their income stream was not automatically reversionary 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.
Options for taking a benefit payment
There are several ways in which the SMSF trustee can make a payment to a member including:
1. Pension payment from an income stream
- Must take at least the minimum pension requirement as a pension payment
- No TBAR required
2. Lump sum payment from a retirement phase income stream
- Can be in-specie or cash
- Is a TBAR event and must be reporte
3. Lump sum from an accumulation account
- Can be in-specie or cash
- No TBAR required
Strategies for source of benefit payments
If a member desires to draw more than the minimum pension payment from their SMSF in 2019-20 then they must decide which interest to make the additional payments from. Some considerations are outlined below:
- The trustee must draw the minimum amount from the pension as a pension payment
- If the member has an accumulation interest, then drawing down on that interest ahead of the retirement phase income stream may help to increase exempt current pension income (ECPI)
- If the member draws additional funds from the retirement phase income stream, over and above the minimum requirement, then reporting those under TBAR as a lump sum payment will reduce the member’s TBA increasing their remaining transfer balance cap
Conversely if a retired member desires less than their full minimum pension payment, for example if it is currently more than they need to spend in a year, the trustee may consider the following trade-off:
- commuting part of the balance to accumulation phase at 30 June could reduce the following year’s minimum payment to a lower desired amount,
- which in turn may reduce or remove the excess amount that the member ends up saving outside super which would have future earnings subject to personal tax rates, however
- this creates an accumulation interest in the SMSF that will reduce ECPI in future years, and
- the taxable component of the accumulation interest will increase with earnings which could impact tax payable on future death benefits to non-dependents.
Strategies for timing of benefit payments
A strategy that trustees can consider where they have both retirement phase income streams and accumulation accounts in a year is to maintain as high a proportion of the fund in retirement phase as possible, relative to the proportion in accumulation phase, in order to maximise ECPI. The trustees could consider the following:
- Draw pension payments and lump sums from retirement phase as late in the financial year as possible
- Draw payments from non-retirement phase accounts as early in the year as possible
- This strategic timing of payments will be particularly effective for large one-off payments
Where a fund does not have disregarded small fund assets and has periods of deemed segregation the fund will use the segregated method for ECPI in those periods. In this scenario, the timing of pension payments or lump sums in the segregated periods will not impact ECPI, timing of payments in any other periods will be helpful in maximising ECPI claimed using the proportionate (unsegregated) method.
Finally, if a member of a fund solely in retirement phase is looking to take lump sum payments then consider completing the partial commutation and lump sum payment on the same day, to avoid creating a day where the fund has an accumulation account, as this could impact ECPI if there is income earned on that day.
Case study: thinking strategically to maximise ECPI
Tim and Kate (both aged 66) have all their superannuation in an SMSF and are retired they have balances and drawdown requirements for 2019-20 as follows:
- 1 July 2019 balances of $1,412,090 and $820,300 in retirement phase, Tim also has $3,045 in accumulation phase having been subject to the transfer balance cap at 1 July 2017
- They would like to draw $75,000 from their SMSF over the year
- Also require an additional $65,000 this year to pay for their daughter’s wedding
Based on this information payments totalling $140,000 are required in 2019-20. This includes minimum pension requirements of 5% of the 1 July pension balances which equates to $70,600 for Tim and $41,020 for Kate, totalling $111,620 in 2019-20.
The fund will not have disregarded small fund assets in 2019-20 as neither member had a total super balance in excess of $1.6million just prior to the start of the financial year.
To maximise ECPI in 2019-20 Tim and Kate considered the following plan:
- Tim withdrew $3,085 as a lump sum payment from his accumulation account on 2 July 2019 to draw this account to $0 as early in the year as possible
- The SMSF will be deemed as having segregated pension assets from 2 July 2019 as the fund will be solely in retirement phase. The fund will claim ECPI using the segregated method for income earned between 2 July 2019 and 30 June 2020 (assuming no contributions are received later in the year)
- They must take $111,620 in pension payments over the year and decide to make regular payments to meet this requirement
- They will take the remaining $25,295 in payments as pension lump sums once the pension standards have been met and will complete a TBAR for those payments within 28 days of the end of the quarter in which the payment occurred