Advisers and their clients should be aware that the timing of pensions payments made throughout the year can have an effect on the level of exempt current pension income (ECPI) an SMSF can claim in a particular year, a superannuation technical expert has said.
Speaking at the SMSF Professionals Day 2018, co-hosted by SuperConcepts and seflmanagedsuper, SuperConcepts SMSF technical services executive manager Mark Ellem told delegates: “When you request the actuarial certificate from the actuary, you know that the actuary will ask for the dates of when contributions come in and when payments are made out, and whether they are pensions or lump sums, and that does have an effect on the ECPI percentage.”
Ellem illustrated this point with reference to a situation where an SMSF member has $1.6 million in pension phase and $400,000 in accumulation phase and was looking to draw an annual income stream of $80,000, while the net earnings of the funds were 6 per cent a year.
Given this set of circumstances, if the member drew down his $80,000 income stream monthly by exhausting the minimum pension payment requirement first and then sourcing the rest of the payments from his accumulation account, he calculated it would give the member an ECPI of 74.65 per cent.
As a point of comparison, he suggested a reversal of this approach whereby monthly income payments above the required 4 per cent minimum pension payments were made from the accumulation account first, with the remaining payments subsequently made from the pension account.
“This approach increases the ECPI to 80.32 per cent because what are we doing? We’re maintaining more money in the pension account because we’re beginning with the lump sum payments from the accumulation account,” he noted.
He then tested a scenario where the amount above the required minimum pension payment is taken as a lump sum from the accumulation account at 1 July with the remaining $64,000 minimum payment drawn from the pension account at 30 June.
According to Ellem, this approach results in an ECPI of 80.64 per cent.
“Again here we’re taking as much out of the accumulation account as possible early and delaying how much we take out of the pension account,” he noted.
