Minimum pension payments @ 50%? –– COVID-19

Minimum pension payments for the current financial year (ie, FY2020) and next financial year (FY2021) have been halved.

This measure addresses concerns of the current market volatility and aims to provide SMSF trustees with discretion and flexibility to better manage their cash flows and retain assets that may have substantially decreased in value in recent times.

The reduced drawdown amounts that apply for account-based pensions and transition to retirement income streams (‘TRIS’) for FY 2020 and 2021 are as follows:

Minimums for allocated pensions

The minimum pension factors for allocated pensions are also halved.

The above table only covers account-based pensions and TRISs.

You must refer to the payment methods for calculating the new lower minimums in the schedules for allocated pensions (ie, schedules 1A and 1AAB of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (‘SISR’)) and market linked pensions (schedule 6 of the SISR).

Note that the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) made changes to several schedules in the SISR that prescribe the method for calculating minimum payments for allocated pensions (schedules 1A and1AAB), market linked pensions (schedule 6) and account-based pensions (including TRISs in schedule 7).

There are several other key points to note as outlined below.

What if you have already paid the minimum?

Unfortunately, the changes may have come too late for those who have already paid at least their minimum pension amounts for the current financial year. In particular, there are no special rules to allow pensioners to repay amounts paid in excess of the revised lower minimums to their fund without the returned amount being counted as a contribution (subject, of course, to the regular contribution rules).

Some members may also have payment above minimum pension documents in place where any amount above the prescribed minimum amount for a financial year is treated as a lump sum withdrawal from their accumulation account or, if there is no accumulation balance, the excess amount above their minimum pension is treated as a commutation of their pension. Note that given the minimum law was only changed on 24 March 2020, it would not be appropriate to treat the ‘normal’ minimum already been paid before this change of law as being halved throughout the period from 1 July 2019 to 23 March 2020 (‘Prior Period’).

Naturally, we would be pleased to provide more guidance to clients who already have payment above minimum pension documents in place to determine whether there is any basis for treating a prior excess amount (above the revised lower minimum) other than a pension payment depending on the particular facts of each case.

On the other hand, if no pension payment has already been paid for the Prior Period, the new minimum pension payment provision has retrospective effect and only half the usual minimum has to be paid for the entire financial year. For example, if James was 60 years on 1 July 2019 and had $1 million in an account-based pension on that date and his SMSF has not made any pension payment for FY2020, then rather than having to pay 4% of his pension account balance on 1 July 2019, ie, $40,000 as a pension, the SMSF trustee only has to pay him 2%, ie, a $20,000 pension for FY2020 prior to 1 July 2020.

Market linked pensions

Note, the minimum for a market linked pension for FY2020 and FY2021 must not be less than 45% of the usual minimum amount calculated under the usual methodology in schedule 6 (rather than the usual amount simply being halved).

Further, it is worthwhile noting that a member who has a market linked pension that commenced prior to 1 July 2017 (which is also known as a ‘capped defined benefit income stream’) may obtain significant advantages from accessing a reduced minimum annual payment if the amount of their usual minimum pension exceeds the ‘capped defined benefit income’ of $100,000 per financial year. Broadly, this is because 50% of the amount exceeding $100,000 is generally assessable to the member and subject to PAYG withholding even if the pension contains a significant tax free component.

Naturally, members with market linked pensions paying above $100,000 per annum should seek advice and consider whether any changes are required to the amount of PAYG withholding, etc.

Appropriate documents are key

Naturally, the SMSF deed or governing rules must authorise the SMSF trustee to pay the reduced minimum amounts as some documents might be ‘hard wired’ with the usual minimums. We confirm that there is no need to vary the DBA Lawyers’ SMSF deed from the 2009-10 version onwards in this regard.

Further, the documents establishing the pension should also be checked to ensure there is flexibility to pay the reduced minimums. Again, the DBA Lawyers’ pension documents do allow the lower minimums without any change. Nevertheless, we recommend that a resolution be prepared that confirms the appropriate calculation to satisfy the requirements for FY2020 and FY2021 if lower minimum pensions are to be paid.

Naturally we would be pleased to review, revise and assist those with other suppliers’ documents to ensure they comply with applicable law.

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

Note: DBA Lawyers hold a range of SMSF CPD training online. Our face to face seminars for the remainder of 2020 have been temporarily suspended. For more details or to register, visit www.dbanetwork.com.au or call Natasha on 03 9092 9400.

For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.

By Daniel Butler ([email protected]), Director, DBA Lawyer

DBA LAWYERS

31 March 2020