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Reduction in the minimum pension requirements
Recently we have seen large falls in the market and corresponding decreases in superannuation balances due to Covid-19. In response to this, a temporary reduction in the required minimum pension payments for account-based pensions and market-linked pensions (including allocated pensions) has been introduced for the 2019-20 and 2020-21 income years.
Minimum pension standards
All account-based pensions (including transition to retirement income streams) and market linked pensions must make a minimum pension payment each year. For account-based pensions this amount is determined by taking the opening pension balance on 1 July of that year (or on the commencement date if during the year) and multiplying this by a percentage factor based on the member’s age at that date. This amount will also be pro-rated if the pension commenced during the year or fully commuted part way through the year.
A market-linked pension account has both a minimum and maximum payment limit which the actual pension payment withdrawn must be between. To determine the payment range you take the opening value of the pension account on 1 July of the income year and divide this by a payment factor detailed in Schedule 6 of the SIS Regulations. This payment factor is based on the remaining term of the pension account. From the calculated payment amount the member is allowed to make pension payments within 10% of the value. In effect, the member can draw between 90% and 110% of the payment amount.
Market-linked pensions commenced after 20 September 2007 must also meet the minimums applying to account-based pensions.
Pension payment reduction
The market loses caused by Covid-19 has seriously impacted the ability of SMSF members to meet their required pension minimums. Lower returns and falling asset prices may force trustees to sell assets, likely at a loss, to maintain liquidity and meet the minimum pension payments. In order to help fund members during this trying time, a 50% reduction to the required minimum has been introduced for the 2019-20 and 2020-21 income years on account-based pensions and market-linked pensions.
For account-based pensions the minimum drawdown percentage is essentially halved, with all existing rules, like; pro-rating, rounding to the nearest $10 and no payment required for June commencements remaining unchanged. The new drawdown percentages are shown below.
| Age on 1 July | Minimum drawdown % of 1 July account balance |
|---|---|
| Under 65 | 2% |
| 65-74 | 2.5% |
| 75-79 | 3% |
| 80-84 | 3.5% |
| 85-89 | 4.5% |
| 90-94 | 5.5% |
| 95+ | 7% |
For market-linked pension accounts the minimum is also halved, with the legislation specifying that pension payments cannot be less than 45% of the payment amount calculated using the formula in Schedule 6 of the SIS Regulations. The maximum available pension withdrawal does not change.
This relief only reduces the required minimum pension payment for the 2019-20 and 2020-21 income years. For those who have already exceeded the minimum based on the reduced requirements they will be unable to refund any of the excess pension payments back to their pension account.
Case Study
Roger was the sole member of an SMSF at 1 July 2019. Roger had a market-linked income stream with an opening balance of $824,000 and a remaining term of 8 years. Based on the remaining term the payment factor for the 2020 income year was 6.87. Using these numbers the pension payments for the year were calculated to be:
Minimum
=$824,000 / 6.87
=$119,942
=$119,942 * 0.9
=$107,950 (rounded to the nearest $10)
Maximum
=$119,942 * 1.1
=$131,940 (rounded to the nearest $10)
The minimum and maximum range for the pension payments was $107,950 to $131,940. Roger decided he would make $120,000 in total pension payments during the year and would do this as a $10,000 payment each month. Roger made his pension payments each month until March when the 50% reduction in required minimum pension payments came in to effect.
At this point the required minimum pension payments can be recalculated as:
=$119,942 * 0.45
=$53,970 (rounded to the nearest $10)
Roger had already made pension payments totalling $90,000 at this point and therefore satisfied the minimum pension requirements without needing to make further payments during the year. Due to this it was decided that no further pension payments will be made.
Unfortunately, even though Roger has now made $36,030 in excess of his required minimum, this amount cannot be refunded back to the pension account. This amount could only be added back to the fund in the form of a contribution if he was eligible to do so.
Conclusion
While this relief may come too late for those who had already fully satisfied their existing minimum requirements, it does provide greater flexibility for those intending to make further payments. If the minimum payments are already met it may be possible to classify any intended future pension payments as accumulation withdrawals to maintain the pension balance, or as lumps sums to allow the member to convert additional balances to retirement phase in the future. The member will also be able to take full advantage of the reduction in the 2020/21 income year.
If you do require any help calculating the minimum pension payment for a client we have updated our minimum pension payment calculator to take in to account the reduction in the minimum pension requirements.
