Written by Mary Simmons, Technical Manager, SMSF Association
As you may be aware minimum pension payments for the previous financial year and the current financial year have been halved for account based pensions, including transition to retirement income streams and market linked pensions. The good news is that as a result of this change, you will not be forced to sell your SMSF’s assets in a falling market simply to comply with the standard minimum pension drawdown requirements.
For the current financial year, you now have the benefit of planning for the reduced minimum pension drawdown. If you are fortunate enough to have cash flow to ride out this period of extreme market volatility, the reduced minimum drawdown could mean that you are able to preserve more of your superannuation savings to benefit from any market upswing when it occurs.
For others, it may be a good opportunity to review your current income requirements and explore some of the benefits of treating withdrawals in excess of the reduced minimum pension drawdown, as lump sums. Withdrawing benefits as a lump sum from a pension account is considered a partial commutation and can be advantageous on a few fronts.
Firstly, it presents an opportunity to transfer ownership of SMSF assets which might otherwise be indivisible or illiquid such as property or unlisted investments to you, as a member. A lump sum benefit paid via an asset transfer (i.e. in-specie) is permitted provided the asset transferred is valued at market at the time of the transfer. If the payment were a pension payment, the asset transfer would not be permitted as pensions can only ever be made in cash.
Secondly, a lump sum commutation from a retirement phase income stream, will result in a corresponding debit in your transfer balance account. This has the potential to allow you to add more capital towards a retirement phase income stream in the future.
Finally, if you are under the age of 60, there is a tax benefit to withdrawing your superannuation as a lump sum with access to the first $215,000 in 2020/21 of taxable component, free of tax, assuming you haven’t used any of this tax free threshold previously. The alternative of receiving a pension, would see the taxable component subject to tax at your marginal tax rate with access to a 15% tax offset.
For the current financial year, should you decide to take withdrawals in excess of your minimum pension you must ensure that you notify the trustee of your intention and it is documented before you receive any lump sum payment. Ensuring the right paperwork is in place before you receive any lump sum payment is critical in light of the ATO’s view that it is not possible to re-classify pension payments once they have been received.
However, in the unique situation of 2019/20, a valid election to your trustee as far back as 1 July 2019, requesting that they treat any payment over your minimum pension amount required for the year as a lump sum will not allow these withdrawals to be treated as lump sums if they were paid prior to 24 March 2020 (the date of the Government’s announcement), and were not in excess of the minimum pension limit that applied at that time. The ATO have recently confirmed that all pension payments made up to 24 March 2020 in excess of the new reduced minimum annual payment can only be treated as pension payments and cannot be treated as lump sums. Only payments you received after 24 March 2020, in excess of your reduced minimum annual pension drawdown, can be treated as a lump sum.
Essentially, this means it’s just bad luck if you took more than the reduced minimum amount as a pension before the change became law on 24 March 2020, despite having in place a valid election to treat any excess pension payments as lump sum commutations. You can only treat payments received after 24 March 2020 as lump sum commutations.
On the other hand, if you chose to receive your pension in the last few months of the f 2019/2020 financial year, provided you had a valid election in place prior to receiving the payment, you will be able to take advantage of the retrospective nature of the reduction in the annual minimum pension drawdown requirements and can treat any excess pension payments as a lump sum commutation.
For example, let’s assume that on 1 July 2019, at the age of 66, you instructed your fund to treat any withdrawal from your account based pension, in excess of the minimum pension drawdown amount, as a lump sum. Your pension balance on 1 July was $1m and your minimum pension withdrawal was originally calculated as $50,000 for 2019/20. Your reduced minimum was re-calculated to $25,000.
Assuming you had arranged to withdraw $5,000 on the last day of every month for 2019/20, then as at 24 March 2020 you would have withdrawn $40,000 from your SMSF. Even though this amount was greater than your reduced minimum, you must treat the entire $40,000 as a pension in 2019/20. The remaining withdrawals, valued at $20,000, will be treated as lump sums.
Alternatively, had you opted to withdraw your benefits in two equal payments, one in December 2019 and the other in June 2020 then only the $25,000 received prior to 24 March 2020 will need to be treated as a pension payment. The entire $25,000 received in June 2020 will be treated as a lump sum because at the time of the payment, your reduced minimum had already been paid.
Although unintentional, this is an example of how retrospective law changes can sometimes lead to inconsistent treatment of retirees.
As this is a complex area, we recommend that you gain the assistance and advice of a qualified SMSF Specialist to take into consideration your specific circumstances. Click here to find your nearest SMSF Specialist.