Drawing down an SMSF pension? It’s time for plan B

By Grace Ormsby

May 27 2020
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With investment values nosediving but SMSFs still required to pay minimum pension amounts, it might be time to consider an alternate plan, a lawyer has urged.

Townsends Business & Corporate Lawyers’ Jonathan See has said “retirement is supposed to be the time when a person enjoys their hard-earned savings”.

This may not be possible when the value of investments made by an SMSF in the financial markets have had a freefall, and can unfortunately require the trustee to conduct an asset sell-off to pay the minimum pension amount out.

While the government has temporarily reduced the standard minimum pension payments by 50 per cent for the current financial year as well as 2020–21, it’s worth noting how this could apply in practice.

To provide an example, Mr See has illustrated the case study of Gino.

At 65 years of age, Gino is the sole member of the Gino Superannuation Fund.

On 1 July 2019, the fund commenced an account-based pension with initial pension balance of $1.5 million, with annual pension amount for the first financial year specified as $75,000.

As a result of the pandemic, the performance of the fund’s investments has been significantly affected and there is insufficient cash to pay the annual pension amount.

As a 65-year-old, Gino has a new minimum percentage withdrawal for the pension phase at 2.5 per cent.

Check the rules

But Mr See said that some governing rules or pension documentation “may be inflexible and require amendment for application of the new regulatory minimum to your pension”.

If Gino does wish to take advantage of the reduced minimum pension rates, he should have the governing rules and relevant documentation reviewed to check the current amount and determine whether variation is required to the governing rules and any terms of the pension.

Once the regulatory minimum pension amount effectively applies to the pension, Mr See outlined: “The new minimum pension amount for the 2019–2020 financial year is $37,500.00 ($1.5 million x 2.5%) instead of $75,000.00 ($1.5 million x 5%).”

The lawyer said “this is good news if the fund is struggling to have the cash to pay the standard minimum pension amount to Gino”.

As Gino only needs to withdraw a lesser amount to comply with the SIS regulations, the fund will not need to sell its assets to pay the standard minimum pension amount.

Cease withdrawals

In addition, if Gino had already withdrawn an amount equal to the new minimum pension amount, Mr See flagged that he can stop making further withdrawals from the pension account.

However, “if he withdrew more than that before adopting the new minimum, he cannot put the excess amount withdrawn back to his super account unless he is eligible to make super contributions and meets the contribution requirements”.

Excess minimum pension payment strategy

The Townsends lawyer noted that with proper documentation, it’s possible to prospectively treat any payment in excess of the applicable minimum pension amount as a “cashing out of a superannuation lump sum” — by way of partial commutation of the pension.

In saying this, Mr See said trustees must still be cautious “not to retrospectively change the nature of any past payments”.

“If, for example, the fund paid Gino $50,000 as a pension on 1 January 2020 and subsequently varied the trust deed and the pension terms on 1 April 2020 to change the annual pension payment amount to the regulatory minimum amount as per Schedule 7 of the SIS Regulations, then the $12,500 in excess of the new minimum cannot be treated as a lump sum payment arising out of a partial commutation of the pension,” he explained.

But where the fund has $50,000 cash available for distribution after adopting the reduced minimum pension rates, Mr See said “Gino can request payment of $37,500 (minimum pension amount) as pension and the balance of $12,500 as a lump sum payment arising out of a partial commutation of the pension”.

This would create an additional unused transfer balance cap of $12,500.

Legal review of deed and pension documents will be necessary, Mr See stated, due to some deeds and pension terms having more restrictive cashing-out conditions than the SIS regulations.

About the author

Grace Ormsby

Grace is a journalist on Momentum Media's nestegg. She enjoys being able to provide easy to digest information and practical tips for Australians with regard to their wealth, as well as having a platform on which to engage leading experts and commentators and leverage their insight.

About the author

Grace Ormsby

Grace is a journalist on Momentum Media's nestegg. She enjoys being able to provide easy to digest information and practical tips for Australians with regard to their wealth, as well as having a platform on which to engage leading experts and commentators and leverage their insight.

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Retirement