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This information relates primarily to account-based pensions.
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The commencement day of a pension is the first day of the period to which the first payment of the pension relates. This will generally be determined by the governing rules of the fund.
Example
Kim decides to start a fortnightly pension on 1 August 2007 from her SMSF and keeps a record of this as trustee for the fund. The date of her first pension payment is 14 August 2007. The governing rules of the fund stipulate that a pension will commence on the date it is agreed by the trustee to pay a pension to a member.
The commencement day of Kim's pension is 1 August 2007.
Pensions that commenced before 1 July 2007
For pensions that commenced before 1 July 2007, you must continue to pay them under the previous pension payment standards unless the pension is an allocated pension. With allocated pensions, you can choose to start paying them under the minimum standards any time after 1 July 2007, without having to commute and start a new pension, provided this is permitted by the rules of your fund.
Pensions that commenced between 1 July and 19 September 2007
For pensions that commenced between 1 July 2007 and 19 September 2007, you can choose to pay the pension under the previous or the new pension rules, provided it is permitted by the rules of your fund.
Pensions that commenced after 19 September 2007
All pensions that commence after 19 September 2007 must meet the minimum pension standards.
The minimum standards mean that the super pensions you pay must satisfy all of the following requirements:
- The pension must be account-based, except in limited circumstances.
- You must pay a minimum amount at least annually.
- You cannot increase the capital supporting the pension using contributions or rollover amounts once the pension has started.
- A pension being paid to a member who dies can only be transferred to a dependant beneficiary of that member.
- You cannot use the capital value of the pension or the income from it as security for borrowing.
- Before you can commute a pension, you must pay a minimum amount in certain circumstances.
There are no maximum draw-down limits for pensions commencing after 19 September 2007, except for transition-to-retirement income streams.
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'Commutation' is a term which generally means the process of converting a pension or annuity into a lump sum payment. This payment can be paid to the beneficiary or rolled over to another product within the same super fund or to another super fund.
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1 What is an account-based pension?
An account-based pension refers to a pension where an account balance is attributable to the member. That is, the amount supporting the pension must be allocated to a separate account for each member.
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There are limited circumstances in which SMSFs can pay non-account-based pensions to members. For more information on non-account-based or defined benefit pensions, refer to SD 2004/1.
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2 How do I calculate the minimum annual payment?
You must pay a minimum amount each year to a member from that member's pension account.
The minimum amount is worked out by multiplying the member's pension account balance by a percentage factor. The amount is rounded to the nearest 10 whole dollars.
The following table shows the relevant percentage factor based on the member's age.
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In response to the downturn in global financial markets, the government provided pension drawdown relief in 2008-09, 2009-10 and 2010-11 by halving the minimum payment amounts. This relief has been extended in 2011-12 and 2012-13 by reducing the minimum payment amounts by 25 per cent. The minimum payment amount is expected to return to normal in 2013-14.
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Age
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Percentage of account balance
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2007-08
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2008-09
2009-10
2010-11
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2011-12
2012-13
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Under 65
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4%
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2%
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3%
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65-74
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5%
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2.5%
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3.75%
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75-79
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6%
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3%
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4.5%
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80-84
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7%
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3.5%
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5.25%
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85-89
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9%
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4.5%
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6.75%
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90-94
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11%
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5.5%
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8.25%
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95 or more
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14%
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7%
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10.5%
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'Account balance' means one of the following:
- the pension account balance on 1 July in the financial year in which the payment is made
- if the pension commenced during the financial year - the balance on the commencement day
- if the amount of the pension account balance is less than the withdrawal benefit that the member would be entitled to if the pension were to be fully commuted - the amount of the withdrawal benefit.
Where the pension commences after 1 July, the minimum payment amount for the first year is calculated proportionately to the number of days remaining in the financial year, starting from the commencement day.
That is, you multiply the minimum payment amount by the remaining number of days in the financial year divided by 365 (or 366 in a leap year):
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If the pension commences on or after 1 June, no minimum payment is required to be made for that financial year.
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Example 1
Thomas commences an account-based pension on 1 January 2008 at age 66. His pension account balance on the commencement day is $250,000.
The minimum annual payment amount would be $12,500 (5% of $250,000). However, as the pension commenced on 1 January 2008, the required minimum amount is calculated proportionately from the commencement day to the end of the financial year:
$12,500 (minimum annual payment amount) x 182 (days remaining) / 366 = $6,215.
The minimum payment required for the 2007-08 financial year is $6,220 ($6,215 rounded up to the nearest $10).
Example 2
Judy commences an account-based pension on 12 June 2008 at age 61.
There is no minimum payment required from the pension account for the 2007-08 financial year as the pension commenced after 1 June 2008.
3 Certain payments cannot be used to boost a member's pension
Once a pension has begun to be paid to the member, you cannot accept or add further amounts to the capital from which the pension is being paid. This means the member's pension account cannot be increased by contributions or rollover amounts.
4 Transfer of pension
If a member dies, the pension can only be transferred or paid to a person who is a dependant of the member, which includes:
- a surviving spouse or de facto spouse
- a child of the deceased who is under 18 years old
- a child of the deceased aged between 18 years and 25 years old who was financially dependant on the deceased
- a child of the deceased aged 18 years old or over, who has a permanent disability
- any person who relied on the deceased for financial maintenance at the time of their death
- any person who lived with the deceased in a close personal relationship where one or both of them provided financial and domestic support and personal care.
5 Capital value of pension cannot be used as security for borrowings
When applying for loans, members cannot use the capital value of the pension or the income from it as security for a borrowing.
6 Minimum payment prior to commutation
If a pension that commenced after 19 September 2007 is to be commuted, you must ensure that at least a minimum amount is paid from the pension beforehand.
The minimum payment must occur in the financial year in which the commutation is to take place.
The amount paid must be at least the pro rata of the minimum annual payment amount.
For pensions that commence in the same financial year in which they are commuted, the pro-rata minimum payment amount is calculated based on the number of days from the start date of the pension to the day it is commuted.
Pro-rata minimum payment amount = minimum annual payment amount x days from start of pension to day pension commuted / 365 (or 366).
Example 3
David commences an account-based pension on 1 January 2008 at age 58. He decides to commute the pension on 30 May 2008, which is in the same financial year as when the pension began.
The account balance of the pension on 1 January 2008 is $235,000.
Based on the account balance at the commencement day of the pension, the minimum annual amount is $9,400 (4% of $235,000). However, as the pension commenced after 1 July 2007 and as the pension was commuted on 30 May 2008, the minimum annual payment amount is calculated proportionately from the commencement day to the date the pension was commuted:
$9,400 (minimum payment amount) x 151 (the number of days from the start of the pension to the date the pension was commuted)) / 366 = $3,878.14.
Therefore, David must be paid at least a minimum amount of $3,880.00 prior to the commutation. The minimum amount determined is rounded to the nearest ten whole dollars.
For commutations in subsequent years, the pro-rata minimum payment amount is calculated based on the number of days from the beginning of the financial year (1 July) in which the pension is commuted to the day the commutation takes place.
Pro-rata minimum payment amount = minimum annual payment amount x days from 1 July to day pension commuted / 365 (or 366).
Example 4
David commences an account-based pension on 1 January 2008 at age 58. He decides to commute the pension on 31 July 2008 - which is not in the same financial year as the pension began.
The account balance of the pension on 1 July 2008 is $240,000.
The minimum annual payment amount from the pension in the 2008-09 financial year is $4,800 (2% of $240,000).
The number of days from the beginning of the financial year (1 July) to the day the pension is commuted is 31.
The pro-rata minimum payment amount for the pension will be $4,800 × 31 / 365 = $407.67. As no payments have been made from the pension in the 2008-09 financial year, the fund must pay David a minimum amount of $410.00 (rounded to the nearest ten whole dollars) prior to the commutation.
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The requirement to make a minimum payment prior to commutation does not apply in circumstances where the commutation arises on the death of a member or where the purpose of the commutation is to:
- pay a super contributions surcharge liability
- give effect to a payment split under the family law provisions
- give effect to a client's right to return a financial product under the corporations law provisions.
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Last Modified: Wednesday, 8 February 2012