Plan B: SMSF pension strategies during the COVID-19 recession
Investment values have nosedived but the SMSF is still required to pay the minimum pension amount – it’s time for Plan B.
Retirement is supposed to be the time when a person enjoys their hard earned savings, i.e. superannuation. However when the value of investments made by the SMSF in the financial markets have nosedived because of the pandemic, and the trustee is pressured to sell assets to pay the minimum pension amount without allowing time for the investments to recover in value, it is time to make a Plan B.
In response to the recent COVID-19 pandemic resulting in the underperformance of the financial markets, the Australian government temporarily reduced the standard minimum pension payments by 50% for the 2019/2020 and 2020/2021 financial years as part of the economic stimulus package. The minimum pension amounts were reduced as follows (subject to pro-rating):
Age Minimum % Withdrawal
Standard Minimum New Minimum
Pension Amount Pension Amount
Under 65 4% 2%
65–74 5% 2.5%
75–79 6% 3%
80–84 7% 3.5%
85–89 9% 4.5%
90–94 11% 5.5%
95 or more 14% 7%
Now let us take a look at the case of Gino.
Gino is 65 years of age and is the sole member of Gino Superannuation Fund (“Fund”).
On 1 July 2019 the Fund commenced an account based pension with initial pension balance of $1.5 million with annual pension amount for the first financial year specified as $75,000.
As a result of the pandemic, the performance of the Fund’s investments has been significantly affected and there is insufficient cash to pay the annual pension amount.
Ensure the current governing rules and pension terms allow payment at the new minimum rates.
Some governing rules or pension documentation may be inflexible and require amendment for application of the new regulatory minimum to your pension. If Gino wishes to take advantage of the reduced minimum pension rates, he should have the governing rules and the relevant pension documentation reviewed to check the current annual pension amount and determine whether any variation is required to the governing rules and/or the terms of the pension.
Cease withdrawing from pension account
Once the regulatory minimum pension amount effectively applies to the pension, the new minimum pension amount for the 2019/2020 financial year is $37,500.00 ($1.5 million x 2.5%) instead of $75,000.00 ($1.5 million x 5%).
This is good news if the Fund is struggling to have the cash to pay the standard minimum pension amount to Gino. As Gino only needs to withdraw a lesser amount to comply with the SIS regulations, the Fund will not need to sell its assets to pay the standard minimum pension amount.
If Gino had already withdrawn an amount equal to the new minimum pension amount, he can stop making further withdrawals from the pension account. If he withdrew more than that before adopting the new minimum, he cannot put the excess amount withdrawn back to his super account unless he is eligible to make super contributions and meets the contribution requirements.
Excess minimum pension payment strategy
With proper documentation, it is possible to prospectively treat any payment in excess of the applicable minimum pension amount as a cashing out of a superannuation lump sum (i.e. by way of partial commutation of the pension). However, the trustee must be cautious not to retrospectively change the nature of any past payments.
If for example the Fund paid Gino $50,000 as a pension on 1 January 2020 and subsequently varied the trust deed and the pension terms on 1 April 2020 to change the annual pension payment amount to the regulatory minimum amount as per Schedule 7 of the SIS Regulations, then the $12,500 in excess of the new minimum cannot be treated as a lump sum payment arising out of a partial commutation of the pension.
If however, the Fund has $50,000 cash available for distribution after adopting the reduced minimum pension rates, Gino can request payment of $37,500 (minimum pension amount) as pension and the balance of $12,500 as a lump sum payment arising out of a partial commutation of the pension. This will create an additional unused transfer balance cap of $12,500.
Legal review of the deed and pension documents will be necessary as some deeds and pension terms may have more restrictive cashing out conditions than the SIS regulations.
Please contact Townsends Business & Corporate Lawyers on (02) 8296 6222 or email email@example.com if you require assistance or advice with pensions or if you need any further information.
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