• Pension standards for self-managed super funds

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

    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.

    On this page:

    Example

    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.

    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.

    What are the minimum pension standards?

    Super 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
    • 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 on or after 20 September 2007, except for transition-to-retirement income streams.

    ‘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.

    What is an account-based pension?

    An account-based pension is where an account balance is belongs to the member. So 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?

    How do I 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.

    Age

    Percentage of account balance

     

    2007–08

    2008–09

    2009–10

    2010–11

    2011–12

    2012–13

    2013–14

    onwards

    Under 65

    4%

    2%

    3%

    4%

    65-74

    5%

    2.5%

    3.75%

    5%

    75-79

    6%

    3%

    4.5%

    6%

    80-84

    7%

    3.5%

    5.25%

    7%

    85-89

    9%

    4.5%

    6.75%

    9%

    90-94

    11%

    5.5%

    8.25%

    11%

    95 or more

    14%

    7%

    10.5%

    14%

    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.

    So you 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 x 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 1

    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) x 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).

    Example 2

    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.

    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.

    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.

    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.

    Minimum payment prior to commutation

    If a pension that commenced on or after 20 September 2007 is to be commuted, you must ensure at least a minimum amount is paid from the pension beforehand.

    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 x days from the commencement day to day pension commuted / 365 (or 366).

    Example 3

    David commences an account-based pension on 1 January 2016 at age 58. 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) x 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 x days from 1 July to day pension commuted / 365 (or 366).

    Example 4

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

    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.

    What rules apply to pensions that 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 5

    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.

    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 6

    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.

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

    As of 20 September 2007, newly purchased market-linked income streams will no longer have 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 pensions 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.

    Furthermore, the rules regarding the non-commutability of transition-to-retirement pensions remain unchanged.

    Example 7

    Jill commenced a transition-to-retirement pension 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.

    See also:

    Why do I need to meet the minimum pension standards?

    All pensions that satisfy the minimum standards will 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).

    If the minimum pension standards are not met, the payments will not be treated as super income stream benefits. This may result in income tax consequences for the fund, including that income earned on pension assets will not be exempt from income tax.

    There may be limited circumstances that warrant the exercise of the Commissioner's general administrative powers to allow an SMSF to continue to claim ECPI 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.

    See also:

    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 PAYG withholding obligations.

    For further information, refer to Calculating the components of a super benefit (NAT 71111) and Schedule 34 – tax table for superannuation income streams (NAT 70982).

    What do I 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
    • met a condition of release
    • elected to be paid a pension under either the current or the former standards (the option to choose is only available in respect of pensions commencing between 1 July 2007 and 19 September 2007).

    More information

    To obtain a copy of our publications or for more information:

    • visit ato.gov.au
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    • write to us at:
    Australian Taxation Office
    PO Box 3100
    PENRITH  NSW  2740

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      Last modified: 20 May 2016QC 20142