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Minimum pension cut offers TBC gain

minimum pension TBC

Individuals can continue to create transfer balance cap space into the 2023 income year by using the extended reduction in the minimum pension.

A continuing strategic opportunity exists for SMSF members to reduce their personal transfer balance cap (TBC) by using the 50 per cent reduction in the minimum pension, which has now been extended to the 2023 income year, an SMSF technical specialist has said.

During a recent webinar, Accurium head of education Mark Ellem noted members can achieve this outcome by maintaining the amount of pension they were drawing down before the financial hardship relief measure was implemented and treating any payment over the minimum pension as a partial commutation of the income stream.

To illustrate the opportunity available, Ellem used an example where an individual aged 76 has an account-based pension worth $950,000 and decides to draw down $70,000 from the income stream every year.

He pointed out the reduction in the minimum pension requirement, being 6 per cent reduced to 3 per cent in this situation, means the member only needs to draw down $28,500 for 2022/23.

The remainder of the standard minimum pension amount of $28,500 and the additional sum of $13,000 can then be treated as lump sum payments via partial commutations of the income stream in question. This in turn will reduce the member’s TBC by $41,000, Ellem noted.

“So for the extension of this 50 per cent into the next financial year means we get this extra $28,500, being that 50 per cent reduction in the minimum pension being continued into the next financial year, that can create an additional $28,500 of transfer balance cap space for the member,” he said.

He stressed the fact the strategy requires one specific piece of documented instruction.

“Our documentation around partial commutations, particularly if we are implementing this strategy, needs to be prospective. [An instruction of intent saying] ‘I wish to commute my future entitlement to $28,500 of pension payments and take it as a lump sum’ if it’s all in one hit [is what would be required],” he said.

During the same webinar, it was established 92 per cent of advisers and accountants had taken advantage of the reduction in the minimum pension in one form or another to date.

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