A senior technical manager has reminded advisers compliance with the minimum drawdown requirements for income streams is more important for death benefit pensions due to the severity of the consequences should this legal obligation not be met.
SuperConcepts SMSF technical and strategic solutions executive manager Philip La Greca said this is the case due to the difference in treatment death benefit pensions receive under law in comparison to standard account-based pensions.
“The critical issues if the minimum pension is not met, and we’re not talking about the first year, we’re talking about subsequent years, [is the pension] is a death benefit and has been tagged as a death benefit. [This means] it cannot be rolled back to accumulation phase,” La Greca told attendees of SuperConcepts’ latest technical webinar held today.
“Because it can’t be rolled back to accumulation [phase], what it means is that account balance has to be paid out as a lump sum superannuation death benefit.
“It’s also taxed as a lump sum death benefit.”
According to La Greca, acknowledging the different treatment afforded to death benefit pensions is key if SMSF trustee are servicing several income streams, including one arising from the passing of a member, and need to choose which pension to allocate a minimum drawdown shortfall against.
“If you’ve got multiple pensions and you’ve got one that has a shortfall, don’t have the one [containing] the shortfall a death benefit pension. So if it’s a reversionary pension or a death benefit pension, ensure you meet the minimum,” he advised.
“[Account-based pensions] can always be rolled back to accumulation [phase, but] death benefit ones can’t be.”
He pointed out SMSF trustees need not worry too much about not being able to meet the minimum drawdown amount on a death benefit pension in the first year of the income stream’s operation as the ATO has confirmed it will accept trustees may not meet the minimum due to difficult administrative issues that can arise upon the death of a fund member.
“[The ATO] will accept it in the first year, but it has not given us that same degree of leeway for any subsequent year,” he warned.
