Meeting Your SMSF Pension Requirements
As we near the end of the financial year, it’s time for SMSF trustees and directors who have income streams to take action. If you haven’t already, you must pay a minimum pension out of your super fund for any income streams before 30 June 2023. This article gives you a quick rundown of what’s involved — and the negative implications of not satisfying this pension requirement. Plus, we show you how our team of specialist SMSF Accountants can help.
What are my pension requirements?
All SMSFs must pay a minimum pension to their income stream members each financial year. This amount must be withdrawn as a cash payment before 30 June. This will satisfy the regulatory requirements allowing you to maintain the pension tax concessions (0% tax on capital gains and income).
How much do I have to pay?
The minimum annual payment amount for account-based pensions is calculated by multiplying your account balance by a percentage factor rounded to the nearest $10.
However, be aware that market-linked income streams (aka term-allocated pensions) and complying pensions are calculated differently and carry further complexities.
- Sophie has an SMSF with a $500k account-based pension
- Sophie is 68 years old, and her percentage factor is 5%
- Therefore, the SMSF must pay Sophie $25,000 to satisfy the minimum pension requirement
TAKE NOTE: In response to COVID-19, the ATO reduced the payment requirements by 50%. However, that reduction ends after the 2022-23 financial year. The standards percentage factors will return in 2023-24.
What are the risks and implications for not meeting minimum pension requirements?
The ATO has very little discretion when granting an exception, so not meeting the minimum pension requirements could lead to several negative implications including:
- For retirement phase income streams (pensions), the fund will lose the tax concession that applies—known as ‘exempt current pension income’ (ECPI). This means the taxable earnings related to that income stream will be taxed at 15% rather than 0%. The pension will lose the ECPI tax concession for the entire financial year and the following financial year until a new pension is commenced.
- Any amounts withdrawn will now be treated as lump sum withdrawals.
- A new pension would need to be commenced, requiring new pension commencement calculations and documents to be prepared and signed by the member and trustee(s). Commencing the new pension could have the following implications:
- Additional costs may be incurred due to having new pension documents prepared and other work required for starting a pension.
- Different tax-free and taxable components to the ‘original’ pension will be incurred if the member has an accumulation account which would merge with the commuted pension balance. This could potentially impact tax paid by beneficiaries upon the death of the pensioner.
- There will be transfer balance cap implications due to the commutation of the ‘original’ and commencement of the new pension.
- Potential social security implications, depending on several factors, such as the commencement date of the ‘original’ pension.
How can E&P help?
E&P’s specialist SMSF accounting team provide an ongoing service. According to E&P SMSF Accountant Amanda Watson, “By maintaining contact with all our SMSF clients throughout the year, we identify potential issues and have these sorted before the annual audit to ensure the fund remains compliant.”
“Regarding pension requirements, however, we proactively contact all our SMSF clients well before 30 June to review current withdrawals and confirm the minimum has been satisfied. If not, we will make a plan with you to ensure we get everything over the line on time”.
This communication was prepared by E&P SMSF Services Pty Limited (ABN 55 139 490 118) (E&P SMSF Services). E&P SMSF Services is a wholly owned subsidiary of E&P Financial Group Limited (ABN 54 609 913 457) (E&P Financial Group) and related bodies corporate.
The information is factual information only and is not intended to be advice, and should not be relied upon as such.
The information provided is correct at the time of writing and is subject to change due to changes in legislation. The application and impact of laws can vary widely based on the specific facts involved. Given the changing nature of laws, rules and regulations, there may be delays, omissions or inaccuracies in information contained.
Any taxation information contained in this communication is a general statement and should only be used as a guide. It does not constitute taxation advice and before making any decisions, you should seek professional taxation advice on any taxation matters where applicable.
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