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  • Pension standards for self-managed super funds

    If you have an account-based pension, also known as a super income stream, the following information will help you understand how the pension standards apply to self-managed super funds (SMSFs).

    What is an account-based pension

    An account-based pension is where an account balance belongs to the member. The amount supporting the pension must be allocated to a separate account for each member.

    There are limited circumstances where SMSFs can pay non-account-based pensions to members.

    See also:

    • SD 2004/1 Superannuation: can a self-managed superannuation fund provide a defined benefit pension? 

    Find out about:

    Pension commencement day

    A pension's commencement day is the first day of the payment period. For example, if a pension is paid fortnightly, it will commence on day one of the 14-day payment period.

    Funds generally determine the frequency of payments.

    Example: Commencement day of pension

    Kim starts a fortnightly pension on 1 August 2015 from her SMSF and keeps a record of this as trustee for the fund. The date of her first pension payment is 14 August 2015. The governing rules of the fund say that a pension will commence on the date agreed by the trustee to pay a pension to a member.

    The commencement day of Kim’s pension is 1 August 2015.

    End of example

    Pensions before 1 July 2007

    You must continue to pay pensions that commenced before 1 July 2007 under the previous pension payment standards, unless the pension is an allocated pension.

    You can choose to start paying allocated pensions 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 between 1 July and 19 September 2007

    Pensions that commenced between 1 July 2007 and 19 September 2007 may be paid under the previous or the new pension rules, provided it is permitted by the rules of your fund.

    Pensions on or after 20 September 2007

    All pensions that commence on or after 20 September 2007 must meet the minimum pension standards.

    Minimum pension standards

    Pensions you pay must satisfy all of the following minimum standards:

    • the pension must be account-based, except in limited circumstances
    • you must pay a minimum amount at least annually. From 1 July 2017, partial commutation payments do not count towards minimum annual pension payments
    • 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 fully commute a pension, you must pay a minimum amount in certain circumstances
    • before you partially commute a pension, you must make sure there are sufficient assets to pay the minimum amount if you have not already done so.

    There are no maximum draw-down limits for pensions commencing on or after 20 September 2007, except for transition-to-retirement income streams that are not in the retirement phase.

    All pensions that satisfy the minimum standards will generally be treated as super income stream benefits for income tax purposes. This means the fund may be able to claim an exemption for the income earned on pension assets, called an exempt current pension income (ECPI).

    Effective 1 July 2017, the government removed the tax-exempt status of earnings from assets that support a transition to retirement income stream (TRIS) that is not in the retirement phase. Earnings from assets supporting a non-retirement phase TRIS will be taxed at 15% regardless of the date the TRIS commenced.

    Members will also no longer be able to treat super income stream payments as lump sums for taxation purposes.

    If the minimum pension standards are not met, the payments will not be treated as super income stream benefits. Failing to meet the minimum pension payment standards for an income stream now not only means the fund loses ECPI for the income year, there are also transfer balance account consequences. These include:

    • the credit that arose when the member started the income stream remains in the individual's transfer balance account
    • the trustee must report to us the date that the super income stream ceases to be in the retirement phase for transfer balance cap purposes. This creates a debit in the individual's transfer balance account at that time. The value of that debit is the value of the super interest which supports the income stream just before it stopped being a super income stream. In most cases this will not equal the original credit, due to payments made over time.

    There may be limited circumstances that warrant the exercise of the Commissioner of Taxation's general administrative powers to allow a pension to continue even though the minimum pension standards have not been met.

    Members will be entitled to tax concessions on benefits paid from the taxed element of the super income stream, including a 15% tax offset if the member is between preservation age and 60 years old. For members aged 60 years or older, benefits paid from the taxed element of the super income stream will be tax free.

    Trustees need to ensure that the tax-free and taxable components of each income stream benefit are correctly determined to enable the fund to meet its pay as you go (PAYG) withholding obligations.

    See also:

    How to calculate the minimum annual payment

    You must pay a minimum amount each year to a member from their pension account.

    The minimum annual payment 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.

    In response to the downturn in global financial markets, the government provided pension drawdown relief in 2008–09, 2009–10 and 2010–11. This relief was extended in 2011–12 and 2012–13. The minimum payment amount returned to normal in 2013–14.

    Percentage of account balance factors, by age

    Age

    2007–08

    2008–09,
    2009–10,
    2010–11

    2011–12,
    2012–13

    2013–14
    onwards

    Under 65

    4.0%

    2.0%

    3.0%

    4.0%

    65–74

    5.0%

    2.5%

    3.75%

    5.0%

    75–79

    6.0%

    3.0%

    4.5%

    6.0%

    80–84

    7.0%

    3.5%

    5.25%

    7.0%

    85–89

    9.0%

    4.5%

    6.75%

    9.0%

    90–94

    11.0%

    5.5%

    8.25%

    11.0%

    95 or more

    14.0%

    7.0%

    10.5%

    14.0%

    Age is either at:

    • 1 July in the financial year in which the payment is made
    • the commencement day if that is the year in which the pension or annuity commences.

    '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.

    Multiply the minimum annual payment amount by the remaining number of days in the financial year and divide by 365 (or 366 in a leap year):

    • Minimum payment amount = minimum annual payment amount × (remaining number of days ÷ 365 (or 366)).

    If the pension commences on or after 1 June in a financial year, no minimum payment is required to be made for that financial year.

    Example:

    Thomas commences an account-based pension on 1 January 2016 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 2016, the required minimum amount is calculated proportionately from the commencement day to the end of the financial year:

    • $12,500 (minimum annual payment amount) × 182 (days remaining) ÷ 366 = $6,215.

    The minimum payment required for the 2015–16 financial year is $6,220 ($6,215 rounded up to the nearest 10 whole dollars).

    End of example

     

    Example:

    Judy commences an account-based pension on 12 June 2015 at age 61.

    There is no minimum payment required from the pension account for the 2014–15 financial year as the pension commenced after 1 June 2015.

    End of example

    What you need to do

    As an SMSF trustee, you may need to amend your fund trust deed so that it meets the minimum pension standards. For more information on how to do this, talk to your legal adviser.

    Record keeping

    You will need to ensure that the fund’s meeting minutes record that a member has:

    • requested to commence a pension, and
    • met a condition of release.

    Where one or more of your members is being paid a pension that commenced between 1 July 2007 and 19 September 2007, you also need to maintain a record of the election to be paid a pension under either the current or the former standards.

    Electing to treat a pension payment as a lump sum for tax purposes

    From 1 July 2017, you are no longer able to elect to treat your pension payments (that is, the periodic payments you receive) as lump sums for tax purposes. This election has been removed for everyone who is receiving a super income stream, which includes a disability income stream or a TRIS.

    This change means that, if you are receiving a super income stream, and have previously made this election, you will no longer have access to the super lump sum low rate cap for payments from your income stream. Therefore, as you will not be able to have your payment/s tax free up to the low rate cap, the amount of tax you have to pay on your super income stream may increase.

    Commutations

    ‘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.

    Each commutation is required to be reported to us as a transfer balance cap event on a transfer balance account report (TBAR).

    Making a large pension drawdown (rather than partially commuting) does not reduce your transfer balance and would not bring you under your transfer balance cap. You must commute an amount of your super income stream in order to reduce your transfer balance.

    From 1 July 2017, there are a number of new super rules that need to be considered when actioning a request to commute a pension:

    • partial commutations no longer count towards the annual minimum pension payment amount
    • trustees need to ensure that at the time a commutation is made
      • where the commutation is for the full amount of the pension, that the minimum pension amount has been paid before you action the commutation, or
      • where the commutation is only partial, the minimum amount is paid before you commute, or that sufficient assets remain to meet the minimum pension payment standards for that year, based on the original value of the income stream at the start of the year.
       

    Full and partial commutations are discussed in more detail below.

    See also:

    Full commutation

    If a pension that commenced on or after 20 September 2007 is to be commuted in full, you must ensure at least a minimum amount is paid from the pension beforehand. This is because the pension ceases at the time the decision is documented to fully commute.

    The minimum payment must occur in the same financial year as the commutation.

    The amount paid must be at least the pro rata of the minimum annual payment amount.

    For pensions commencing in the same financial year they are commuted, the pro-rata minimum annual payment amount is calculated using the number of days from the commencement day of the pension, to the day it is commuted.

    Pro rata minimum payment amount = minimum annual payment amount × days from the commencement day to day pension commuted ÷ 365 (or 366).

    Example:

    David commences an account-based pension on 1 January 2016 at 58 years old. He decides to commute the pension on 30 May 2016, which is in the same financial year the pension began.

    The account balance of the pension on 1 January 2016 is $235,000.

    Based on the account balance at the commencement day of the pension, the minimum annual payment amount is $9,400 (4% of $235,000). However, as the pension commenced after 1 July 2015 and it was commuted on 30 May 2016, the minimum payment amount is calculated proportionately from the commencement day to the date the pension was commuted:

    • $9,400 (minimum annual payment amount) × 151 (the number of days from the commencement day of the pension to the date the pension was commuted) ÷ 366 = $3,878.14.

    David must be paid at least a minimum amount of $3,880.00 (rounded to the nearest 10 whole dollars) prior to the commutation.

    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 × days from 1 July to day pension commuted ÷ 365 (or 366).

    End of example

     

    Example:

    David commences an account-based pension on 1 January 2016 at 58 years old. He decides to commute the pension on 31 July 2016 – which is not in the same financial year as the pension began.

    The minimum payments were made from the fund during the first year, as required. The account balance of the pension on 1 July 2016 is $240,000.

    The minimum annual payment amount from the pension in the 2016–17 financial year is $9,600 (4% 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 $9,600 × 31 ÷ 365 = $815.34. As no payments have been made from the pension in the 2016–17 financial year, the fund must pay David a minimum amount of $820.00 (rounded to the nearest 10 whole dollars) prior to the commutation.

    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 sole 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.
    End of example

    Partial commutation

    A partial commutation of an account-based pension does not count towards the minimum pension payment.

    Where the super income stream is partially commuted, the value of the super interest supporting the super income stream is reduced.

    It is important that trustees prepare and keep records of all decisions made, including those in relation to member payments. These decisions must be documented before the payment is actually made. This is particularly important in relation to the type of payment being made (ie commutation or a pension payment).

    Each commutation will need to be reported to us as a transfer balance cap event on a TBAR and for some trustees this may mean more events to report 28 days after the end of the quarter in which they happened.

    At the time the partial commutation is made, the trustee will need to ensure that they have already satisfied the minimum pension requirements, or that sufficient assets remain to meet the minimum pension payment standards for that year, based on the original value of that income stream.

    Certain payments cannot add to 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.

    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 and 25 years old who was financially dependent 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.

    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.

    Rules that apply to pensions commenced before 1 July 2007

    Super pensions which commenced before 1 July 2007 and complied with the pension rules at that time must continue to be paid under the former rules unless it is an allocated pension. Super pensions include market-linked pensions, lifetime pensions and life expectancy pensions. These also include pensions commenced under the transition-to-retirement measure.

    Allocated pensions

    Allocated pensions which commenced before 1 July 2007 can operate under the new minimum pension standards from 1 July 2007 without the need to commute and restart a new pension. This may save the cost of moving to a new pension.

    Example: allocated pensions

    Janet commenced an allocated pension on 1 January 2007 which complied with the rules for allocated pensions at the time.

    Janet decides to have her allocated pension operate under the minimum pension standards from 1 November 2007. Subject to the rules of the fund, Janet can do this without the need to commute and restart the pension. Therefore, the minimum payment standards will apply from 1 November 2007 and the minimum annual payment amount will be based on the pension account balance at 1 July 2007. Janet's fund will need to keep a record of Janet’s request to change the payment rules for her pension.

    If Janet had continued the pension under the former rules, the minimum and maximum draw-down limits that applied to the allocated pension would have continued.

    End of example

    Complying pensions

    Generally, complying super pensions (market-linked, lifetime and life expectancy pensions) which commenced before 1 July 2007 are not able to be commuted in order to start another pension to adopt the new pension rules.

    An exception applies for existing complying pensions which are commuted on or after 20 September 2007 in order to purchase a market-linked pension. In these circumstances, the new minimum pension standards will apply to the new market-linked pension, in addition to the rules that normally apply to market-linked pensions.

    Example: complying pensions

    Robert commenced a market-linked pension on 1 March 2007 and continued to receive the pension after 19 September 2007 under the former rules.

    On 1 December 2007, Robert decided to commute and roll over the residual balance of the pension to purchase a new market-linked pension. Robert must ensure that the rules for the pension meet the minimum payment standards as well as the rules that normally apply to market-linked pensions.

    End of example

    Changes to Centrelink assets test for market-linked pensions (or term-allocated pensions)

    As of 20 September 2007, newly purchased market-linked income streams no longer had a 50% pension balance exemption from the Centrelink assets test.

    Trustees need to have commenced the market-linked pension before the 20 September 2007 deadline if they wanted to receive the 50% asset exemption.

    Transition-to-retirement

    Transition-to-retirement income streams (TRIS) commencing on or after 1 July 2007 must also satisfy the minimum pension standards as well as the additional requirement that pension payments must be restricted to a maximum of 10% of the pension account balance as it stands at 1 July of each financial year or the commencement day of the pension.

    Example: TRIS

    Jill commenced a TRIS on 1 July 2008 when she was 57 years old. Her pension account balance on the commencement day was $300,000.

    The minimum annual payment amount is $6,000 (2% of $300,000).

    The maximum annual payment amount is $30,000 (10% of $300,000).

    Accordingly, these minimum and maximum payment limits will apply to Jill’s pension for the 2008–09 financial year.

    Pensions that commenced before 1 July 2007 and complied with the transition-to-retirement rules at the time are deemed to satisfy the new requirements and may continue to be paid under the former rules.

    End of example

    See also:

    More information

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      Australian Taxation Office
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      PENRITH  NSW  2740

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      Last modified: 01 Nov 2018QC 20142