Minimum Drawdowns for Account Based Pensions
1.
Background
This article considers account based pensions
paid from a Self Managed Superannuation Fund.
Specifically, it will cover the requirements
under superannuation law for a minimum annual
drawdown from an account based pension.
Superannuation law requires that account based
pensions paid from an SMSF must satisfy certain
conditions. One of these conditions is that a
minimum amount must be paid from the pension
account each financial year.
2.
To calculate the minimum annual payment, the member’s pension account balance is multiplied by a percentage factor and then rounded to the nearest 10 dollars.
Minimum annual payment = percentage factor x account balance.
The percentage factors are shown in the table below:
The account balance used
in this calculation will be either the member’s
pension account balance on 1 July in the
financial year in which the payment is made, or
if the pension commenced during the financial
year, the account balance on the commencement
day. Similarly, the age used is the member’s age
on 1 July in the financial year in which the
payment is made, or if the pension commenced
during the financial year, the member’s age on
the commencement day.
As can be seen in
the above table, the minimum drawdown amounts
for 2008/09, 2009/10 and 2010/11 were halved to
provide relief from the decline in the
investment markets arising from the global
financial crisis. This relief continued in
2011/12 and 2012/13 as a 25 percent reduction to
the usual percentage factors. The minimum
drawdown amounts returned to normal for the
2013/14 to 2018/19 financial years. For 2019/20
and 2020/21 financial years, the minimum
drawdown amounts have also been halved, to
provide relief from the decline in the
investment markets arising from COVID-19.
In the financial year in which the pension
commences, the minimum is reduced to allow for
the number of days remaining in that financial
year:
Minimum payment in first year = minimum annual payment x remaining number of days / 365 (or 366 in a leap year).
If the pension commences on or after 1 June in a financial year, no minimum payment is required for that financial year.
3.
Account based pensions were introduced as part
of the Simpler Superannuation reforms which came
into effect on 1 July 2007. The above standards
for minimum pension drawdowns apply to all
account based pensions that commenced on or
after 20 September 2007.
If your SMSF is
paying a pension that commenced before 1 July
2007 it must continue to comply with the
previous pension payment standards unless the
pension is an allocated pension. For allocated
pensions that commenced before 1 July 2007, you
can elect to have the new minimum standards
apply without having to commute and start a new
pension, provided your Fund’s trust deed permits
it. Alternatively, you can elect to continue to
pay the pension under the previous standards –
which means the pension will have a different
minimum and also a maximum drawdown limit
applying.
For SMSFs paying pensions that
commenced between 1 July 2007 and 19 September
2007 you can elect to either pay the pension
under the previous or the new pension standards,
provided your Fund’s trust deed permits it.
Transition to retirement pensions commencing
on or after 1 July 2007 also need to comply with
the above minimum pension drawdown standards.
Transition to retirement pensions also have a
maximum drawdown of 10% of the pension account
balance on 1 July of each financial year (or on
the commencement day of the pension if it
commenced in that year).
If you are
planning on fully commuting your account based
pension, you are still required to make the
minimum drawdown for that financial year before
the pension is commuted. The minimum drawdown
for the financial year in which the pension is
fully commuted is calculated on a proportional
basis, in a similar way to when a pension
commences during the year.
If the
pension is commuted due to the death of a
member, no minimum payment is required in that
year. However, if the pension is automatically
transferred to a dependent beneficiary as a
reversionary pension, the pension is continuing
and so the minimum payment must still be made.
For the financial year in which this occurs, the
minimum payment is calculated according to the
primary pensioner’s age. For the following
financial year, the reversionary beneficiary’s
age on 1 July must be used to calculate the
minimum drawdown.
The information provided in this document is not
financial product advice.
It does not take into account your
specific circumstances or needs.
While Verus SMSF Actuaries has taken care
to ensure that the information is accurate you
should seek appropriate professional advice
before acting on any of the information
provided.
Updated November 2020