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Trustees must check pension timing

minimum pension timing

Trustees who have been paid more than the new minimum pension amount need to check the timing of payments before seeking to use the excess as a commutation.

SMSF trustees need to examine the timing of any minimum pension payments taken before and after the implementation of the coronavirus relief package, with an SMSF administrator warning not all amounts above the minimum can be reclassified as lump sum payments.

Heffron chief executive Meg Heffron said SMSF members who had already taken the full minimum pension would not be able to put any of it back into their fund as it would be treated as a contribution, but could instead treat it as a partial commutation.

Using an example of someone who had a minimum pension amount of $50,000 at 1 July 2019 and had taken $30,000 prior to the new minimum pension rules, Heffron said the key issue was what funds were drawn before the law changed.

“A common question we will be getting is can these payments [of $30,000] be reclassified as $25,000 pension payments and $5000 lump sum payments, and the logic here is that if someone only has to now take $25,000 as a pension, can they take the excess as a lump sum to get back some of their transfer balance cap?” she said during a webinar yesterday.

“In our view the answer is no because at the time the $30,000 was drawn the minimum amount was $50,000. What changed after that was the minimum got reduced. The way the law worked at that time, the $30,000 was a pension payment.”

She said this would still be the case where an SMSF used a special minute from 1 July 2019 that stated the fund trustees had decided to make all payments as pensions until they meet the minimum and any excess would either be a lump sum commutation or a drawing from an accumulation account.

“The logic is that you can’t retrospectively take a commutation but have to choose to take it in advance. Even a special minute can only document upfront about how a member can choose to take it, such as minimum first and excess as commutation, but at the time the $30,000 was taken, the minimum was $50,000,” she said.

She pointed out a lower payment, such as $10,000, prior to the new halved minimum would allow any excess to be taken as a commutation.

“If a member had only taken $10,000 and subsequently took $20,000 after the rule change, there would be no problem in saying $15,000 was a pension payment,” she said.

“This is because the initial $10,000 plus the additional $15,000 would reach the new minimum of $25,000 and the excess $5000 will be a commutation or drawn from the accumulation account as long as documents were in place beforehand stating that, such as a special minute.”

She said this approach would apply to the majority of SMSFs, but recommended trustees and members check that older trust deeds did not set their own terms for pension payments.

“It is rare, but occasionally a trust deed will articulate the factors themselves and lock a member into a particular way of calculating the minimum pension. If you have an old deed like that, it should be replaced because it will lock you into drawing more than you want,” she said.

In the same webinar, Heffron head of SMSF technical and education services Lyn Formica warned superannuation members against trying to access their funds via early release provisions announced by the government and then attempting to use them as additional contributions.

Formica noted the ATO was aware of this possibility and would be monitoring the use of any funds provided via early release.

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