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COVID-19 creates pension amount rethink

minimum pension amount

Advisers should consider a members’ income needs and cash sources outside of their SMSFs when calculating a COVID-19 reduced minimum pension amount.

Advisers need to ensure they take members’ actual income needs and external sources of cash into account when applying the reduced minimum pension amount measures introduced by the government as part of its economic response to the COVID-19 pandemic, an SMSF technical expert has said.

Verante Financial Planning SMSF specialist adviser Liam Shorte said the government’s COVID-19 relief provision of a 50 per cent temporary reduction in minimum pension requirements should prompt advisers to keep in mind factors such as changes to members’ income needs and possible cash sources outside of their fund in order to produce the most favourable outcome for clients during the 2021 financial year.

“Some of the questions you need to ask your clients are what are the member’s actual income needs in this reduced year where they may not be travelling, they may not be spending as much, [and] they may not require the same amount as they have in previous years,” Shorte said at the SMSF Association Technical Day 2020 last week.

“Do they have any lazy cash sitting outside the fund that they could use rather than drawing down on some of the pension funds? With the interest rates now dropping below 1 per cent, it may be better to use some of the cash that’s sitting outside the fund to cover some living expenses rather than using pension investments to fund them.”

He noted advisers should also consider other planning opportunities that might be available to clients as a result of the temporary reduction.

“Your clients may still want the same amount of pension, but is there a better way of taking it?” he added.

“The things you’re trying to do are maximise the exempt current pension income, look at the death benefit tax implications and also [a possible] opportunity to equalise the member accounts within the SMSF.”

Last week, SMSF Association deputy chief executive and policy and education director Peter Burgess said the industry body had called on the ATO to exercise its regulation-making powers to correct an anomaly that had surfaced due to a technical change to commutations to an income stream from a market-linked pension that was passed as law during the June parliamentary sitting.

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