2020 pension rules hurt retirees

excess pension payments

The ATO’s approach to how excess pension payments made before and after 24 March should be treated will disadvantage some retirees.

The ATO’s treatment of excess pension payments for the 2020 financial year is an example of how retrospective law changes can disadvantage retirees, an SMSF technical expert has said.

SMSF Association technical manager Mary Simmons said the ATO’s approach to the treatment of excess pension payments made before and after 24 March, at which time minimum pension drawdown amounts were halved as a COVID-19 relief measure, would affect those who elected to receive pension payments before that date.

Simmons said the disadvantage for some retirees was a result of the regulator’s insistence that its treatment would be applied even where SMSF members elected as far back as 1 July 2019 to have any amounts above the prescribed minimum pension drawdown required during the 2020 financial year be treated as a lump sum withdrawal.

“Essentially, it’s just bad luck for any member who took more than the reduced minimum amount as a pension before the change became law on 24 March 2020, despite having in place a valid election to treat any excess pension payments as lump sum commutations. These members can only treat payments made after 24 March 2020 as lump sum commutations,” Simmons said in a blog post on the SMSF Association website.

By contrast, members who had chosen to receive their pension later in the financial year and had a valid election in place before receiving the payment would benefit from the retrospective change to the law, she noted.

“They will be able to take advantage of the retrospective nature of the reduction in the annual minimum pension drawdown requirements and can treat any excess pension payments as lump sum commutations,” she added.

“Although unintentional, this is an example of how retrospective law changes can sometimes lead to inconsistent treatment of retirees.”

She also pointed out the new formula for the calculation of the transfer balance cap (TBC) debit on the commutation of a market-linked pension, which was implemented in June but applies from July 2017, was another example of how retrospective law changes could disadvantage retirees.

In the case of changes to the TBC debit calculation, members who restructured into new market-linked pensions based on the original formula might find themselves at risk of being in excess of their TBC, she said.

“We continue to work with the ATO on this issue and have called for the use of the regulator’s regulation-making powers to essentially create a write-off transfer balance account debit for those members who, prior to the announcement of the new formula, restructured into a new market-linked pension in good faith based on the original law,” she said.

In March, Heffron chief executive Meg Heffron said SMSF trustees needed to examine the timing of any minimum pension payments taken before and after the implementation of the coronavirus relief package, warning not all amounts above the minimum could be reclassified as lump sum payments.

In June, the Self-managed Independent Superannuation Funds Association called on the federal government to refund excess pension payments for the 2020 financial year that were above new, temporary thresholds, and remove proportionate indexation of the transfer balance cap.

Copyright © SMS Magazine 2024

ABN 43 564 725 109

Benchmark Media

Site design Red Cloud Digital