SMSF members drawing a pension may still be uncertain whether the minimum drawdown amount will change, but this should not stop them ensuring they are proactively planning to use their pension in the next financial year, according to an SMSF strategy expert.
Smarter SMSF chief executive Aaron Dunn said the future of the 50 per cent reduction in the minimum drawdown amount for a pension, introduced as a COVID-19 relief measure, was likely to be addressed in next week’s budget, but pension recipients need to plan as if it would revert to previous levels.
“I suspect we will see something announced by the federal government in the federal budget as to if we are going to see a transition next year to the ordinary minimum pension factors. From the global financial crisis, we did see a 50 per cent reduction, then a 25 per cent reduction and then back to normal,” Dunn said during a recent webinar.
“However, the issue to be conscious of here is the Retirement Income Review noted many people are not dipping into their superannuation and were trying to use the income it produces rather than eating into the capital over their retirement. With that overlay the government may say things are not right back to where they were.”
He pointed out there was an obligation in retirement to use that money for retirement purposes rather than for estate planning purposes as part of the superannuation reforms introduced in 2017, and there were strategies to deal with the current pension thresholds.
“There will be clients that are taking more than their temporary reduced 50 per cent amount,” he said.
“Thinking about where there may be a transfer balance cap (TBC) issue for them, we only want to take the minimum pension for the year, get the tax exemption and then with the other amounts we are going to be looking at and tapping into the accumulation benefit, because it is going to consistently improve the tax exemption or ECPI (exempt current pension income) in the fund year on year thereafter.
“For those that don’t have an accumulation account, which may create an excess transfer balance in the future, we would be looking to employ a partial commutation strategy, that is, trying to get us a debit against that individual’s TBC that is going to allow us to soak up more of that pension benefit that may either automatically revert or they may want to commence as a death benefit income stream.
“You need to give due consideration to these requirements and most importantly document all these decisions prospectively.
“We’ve got the reference points around what is required to make a valid commutation and the context of it being prospective here is absolutely fundamental to that process.
“Any failure for that to be prospective is going to mean the denial of the amount being treated as the commutation, which therefore will result in it being claimed as pension payments.”
