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What is the reduced minimum pension for the 2020 financial year?
The required minimum pension amounts required to be drawn from an SMSF for the 2020 and 2021 financial year have been reduced by half (50%).
The following table shows the change to you depending on your age:
The draw-down amount is calculated from a member balances as of the 1st of July each financial year (or for practical purposes the 30 June balance from the preceding financial year).
To meet the minimum pension 2020 draw-down requirement, at least one payment must be made in the financial year, and it must be made in cash prior to 30 June 2021. Where a pension commences part way through a financial year, a pro-rata minimum pension draw-down applies and is calculated based on the number of days remaining in the financial year.
What type of SMSF pensions does the reduced minimum apply to?
The 50% minimum pension reduction applies to the following types of pensions:
Account based pensions
Transition to retirement pensions
Market-linked pensions
Is the 50% reduction in minimum required pension for 2020 and 2021 now law?
Yes. The Bill gained Royal Assent on Tuesday 24th of March 2020.
An SMSF member has taken over the reduced minimum pension amount, can they return the excess?
No.
SMSF members will not be able to return funds to their accounts unless they meet contribution eligibility. We do not believe there will be amendments to allow individuals to return already drawn pension money
There is no direct ATO guidance on returning ‘accidental’ withdrawals, however there is some information relating to contributions made incorrectly being refunded (restitution for mistake). In the context of this change, any attempted reversals would definitely draw the attention of the ATO and the independent auditors of the SMSF and therefore should be avoided.
Can amounts over the reduced minimum pension be treated as a lump sum from a partial commutation?
Possibly.
SMSF members cannot retrospectively make a decision to re-categorise a pension payment as being a lump sum. All pension payment strategies are documented and are prospective.
That means that actions should not be backdated and the appropriate documentation is in place to detail the pension payments that have been taken. Once the reduced minimum pension draw-down has been satisfied in the current financial year, members may choose to withdraw additional amounts as partial lump sum commutations from their pension.
An example of a lump sum payment request and trustee minute can be downloaded here (Word document): Member Lump Sum Request & Trustee Minute Template
To be clear, if an SMSF member has been making regular monthly withdrawals and treating them as pension payments, these payments cannot be re-categorised as partial commutations or lump sum payments from an accumulation account. For example:
Jane’s minimum pension for the 2020 financial year is $60,000
Jane has set up an automatic monthly payment from her SMSF to her personal bank account for $5,000 per month
With the 50% reduction Jane’s new minimum pension is $30,000
As at the 24th of March 2020, Jane has received 9 x monthly payments of $5,000 totalling $45,000
Jane cannot retrospectively change the treatment of the 3 x $5,000 pension payments for January, February and March 2020 to partial commutations or payments from her accumulation balance within the SMSF
By comparison, the following example does not involve a re-categorisation of payments:
Gary’s minimum pension for the 2020 financial year is $60,000
Gary has set up an automatic monthly payment from his SMSF to his personal bank account for $3,500 per month and also liaises with his SMSF administrator in June each year to take up any ‘top-up payment’ to meet the minimum pension draw-down requirements
With the 50% reduction Gary’s new minimum pension is $30,000 and he has taken $31,500 July 2019 through to March 2020
In January 2020, Gary made an additional withdrawal of $30,000 from his SMSF to pay off his credit card
At the time of, or before making the $30,000 withdrawal, Gary documented his decision to take an additional amount and treat it as a lump sum payment
Gary has met his minimum pension for the 2020 financial year and is not required to take anything further prior to 30 June 2020
It also need to be remembered that any partial commutations of pensions must be reported to the ATO under the events-based reporting framework (TBAR). Where a fund member has a Total Superannuation Balance (TSB) ≥ $1.0m, the fund must report all events for all members within 28 days after the end of the relevant quarter.
Where no members have a TSB above $1.0M they are an annual TBAR reporter and the due date is the same as the due date of the SMSF annual return.
Can pension payments be re-allocated to a spouse / partner / husband / wife to meet their reduced minimum pension?
Possibly.
Generally, a member can direct where their pension payment goes so depositing the money into the husband’s bank account is unlikely to determine ‘who’ was the pension recipient.
However, the trustee’s minutes will be important as they will reflect for whom the pension payment was made at the time it was made. This will be supported by the accounts of the fund which will reflect a reduction in that member’s balance accordingly.
Take the following example:
Phil and Janet both receive an account-based pension from their SMSF
Phil’s minimum draw down is $20,000 for the 2020 year and Janet’s is $30,000
Phil and Janet take irregular payments throughout the year, and where necessary take a catch-up payment before 30 June to ensure their minimum pension has been met
Pension payments are made into their joint account and typically allocated to Phil first up to his minimum and then to Janet with anything above their combined minimums allocated to Janet by their SMSF administrator
For the period July through to 24 March 2020 Phil and Janet have taken $28,600 in pension payments between them
These payments can be allocated as follows: $11,440 to Phil and $17,160 to Janet
Phil and Janet have met their minimum pension requirements for the 2020 financial year and can elect to take any additional payments as partial commutations of their account based pensions or as a lump sum from their accumulation accounts (if present)
Does the 50% pension reduction apply to Complying Pensions?
No.
The pension reduction applies to account based pensions including allocated pensions, transition to retirement pensions and market-linked pensions.
It will not apply to complying lifetime pension (SIS Reg 1.06(9)) or complying life expectancy pensions (SIS Reg 1.06(7)).
Can amounts in excess of the reduced minimum be deposited back into the SMSF as a contribution?
Yes – if the SMSF member is eligible to make a contribution.
It’s essential SMSF members seek advice to ensure their eligibility to make both concessional as well as non-concessional contributions.
For SMSF members over the age of 65, the work test requirement still needs to be fulfilled. This is 40 hours in a 30 day period.
Also, SMSF members need to check their Total Superannuation Balance (TSB) to determine their eligibility to make non-concessional contributions as well as utilise the bring-forward rule if they are under the age of 65:
An important consideration in regards to the Total Superannuation Balance (TSB) is that it is calculated from the balances of the members account (including any super or pension accounts external to the SMSF) as at 30 June the preceding financial year.
So although an SMSF account balance may have significantly dropped due to investment market conditions in the 2020 financial year, the TSB remains at it’s 30 June 2019 balance until after 30 June 2020 balances can be calculated.