New Minimum Pension
This article is designed to assist SMSF Auditors, Trustees and Accountants to understand the pension rules and the implication of reducing the minimum pension age to 67 years and what it means for the pension members and their accounts.
Minimum pension age has reduced to 67 years.
So what does this mean for pension members?
Have you ever thought of the prospect of retirement? I know for my parents, the thought of retirement is a distant dream, even at their age. Reason being, they started their life in Australia late, so they are playing catch-up. For the majority of 1st generation new arrivals into Australia, this would generally be the case also.
For the select few, and new generation of baby boomers and Gen X and Gen Y interested in the superannuation and retirement savings, the age 67 years will become the new norm for the minimum age of retirement (well, from 2023 anyway).
As an SMSF auditor, with plenty of Rules and Regulations spinning around our head, we need to concern ourselves with the following SIS Regulations that apply for pension members which are: SIS Sub Reg 1.06 (9A), SIS Reg 5.08 and SIS Reg 6.17
|Sub Reg 1.06 (9A)||Pension payments must be made at least annually, and must be at least the amount calculated under Schedule 7|
|Reg 5.08||Member minimum benefits must be maintained in the fund until transferred, rolled over, allotted (to the member’s spouse) or cashed out in a permitted fashion|
|Reg 6.17||Payments of member benefits must be made in accordance with Part 6 or Part 7A of the regulations and be permitted by the trust deed|
SIS Sub Reg 1.06 (9A)
All pensions that commence on or after 20th September 2007 must meet the minimum pension standards.
In order to satisfy the pension 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 rollovers once the pension has started
- A pension being paid to a member who dies can only be transferred to a dependent beneficiary of that member
- You cannot use the capital value of the pension or income from the pension as security for borrowing
- Before commuting a pension, you must pay the minimum pension in certain circumstances.
There is no maximum pension on the account, unless the pension account is a 10% maximum on a TRIS/ TTR pension account.
According to the Australian Taxation Office, the minimum pension payment balances (from 2013/14 financial year) are:
Under 65 years – 4 %
Age 65-74 years – 5 %
Age 75-79 years – 6 %
Age 80-84 years – 7 %
Age 85-89 years – 9 %
Age 90-94 years – 11 %
Age 95 + – 14 %
These above pension rates are only for Minimum Account-Based Pension accounts.
SIS Reg 5.08
In order to access your superannuation, you must have satisfied a condition of release to access your preserved and restricted non-preserved benefits. You can cash in your unrestricted non-preserved benefits at any time.
The most common conditions of release for paying benefits are that the member:
- Has reached their preservation age and has retired
- Has reached their preservation age and begins a TTR pension
- Ceases an employment arrangement on or after the age of 60 years
- Is 65 years (even if not retired) – soon to be increased to 67 years after 2023.
- Has died.
A member can also access their superannuation benefits in special circumstances:
- Termination of gainful employment
- Permanent incapacity
- Temporary incapacity
- Severe financial hardship
- Compassionate grounds
- Terminal medical condition
As the Trustee, you must ensure that the member has actually satisfied a condition of release before any monies are actually released from the Fund.
Failure to satisfying a condition of release will result in the payment of benefits not being treated as super benefits, rather, they will be taxed as ordinary income at the members’ personal marginal tax rates. Major penalties also apply to the Trustees, and also to the Fund.
SIS Reg 6.17
Pension payments must be made in cash. No exceptions. The days of posting a manual journal entry at 30 June to balance the pension account is history. So, what happens when the Fund has not made the minimum pension balance for the year?
Well, if the Fund fails to meet the minimum pension payment requirement, the strict letter of the law is that the failure is taken to cease the pension at the start of the income year, for tax purposes. This means, the Fund will need to be converted to accumulation mode, and pay 15% nominal income tax on its earnings, and may also be required to include the ‘pension withdrawals, now treated as lump-sum payments’ may also have further personal tax consequences for the member depending on their age etc.
About the author:
The author is Dinesh Nanayakkara, an ASIC Registered SMSF Auditor providing SMSF Auditing Services to the wider community for the past 5 years and has been involved in the SMSF Industry for more than 10 years. Dinesh holds a Diploma of Financial Planning and is an SMSF Association SMSF Specialist Auditor.
Dinesh is actively involved in education programs to educate SMSF Accountants and fellow SMSF Auditors to increase their understanding of various compliance issues and its requirements.
D.S Audit Services is an SMSF Audit-only firm and do not provide financial advice. All information provided is general in nature, and has been prepared without taking into account of the Trustees’ objectives, financial situation or needs. Trustees are advised to consider their own circumstances and seek advice from a Licensed Financial Advisor before investing or making any decision.