Pension rule hurts retirees

A self-managed super fund expert believes the way that the Australian Taxation Office (ATO) treats excess pension payments this year will disadvantage some retirees.

According to SMSF Association technical manager Mary Simmons, the changes to the minimum pension drawdown amounts that were announced by the federal government on 24 March would negatively affect those who elected to receive lump sum pension payments before that date.

Ms Simmons wrote on the SMSF website that the ATO’s ruling that pension payments already received by a member could not be reclassified would hurt some retirees.

Normally any amounts above the prescribed minimum pension drawdown in a financial year are treated as a lump sum withdrawal.

“Essentially, pension payments made up to 24 March 2020 (the date of the government’s announcement) in excess of the new reduced minimum annual payment will be treated as pension payments in 2019/20 and cannot be treated as lump sums,” Ms Simmons explained.

“More importantly, the ATO have confirmed that this treatment also applies where a valid election was in place as far back as 1 July 2019, requesting that the trustee treat any payment over the minimum pension amount required for the year as a lump sum.

“In this situation, only payments made to a member, after 24 March 2020, in excess of the reduced minimum annual pension drawdown, can be treated as a lump sum.”

The ruling from the ATO means that those retirees who took out more than the reduced minimum amount as a pension before 24 March, even if they elected for payments over this amount to be treated as lump sum commutations, would only be able to do so for the payments made after this date.

To explain the differing treatments retirees will receive due to the COVID-19 changes, Ms Simmons offers the following case study.

“Simon aged 66 instructed his fund to treat any withdrawal from his account-based pension, in excess of the minimum pension drawdown amount, as a lump sum. Simon’s pension balance on 1 July was $1m and his minimum pension withdrawal was originally calculated as $50,000 for 2019/20. His reduced minimum was re-calculated to $25,000.

“Simon had arranged to withdraw $5000 on the last day of every month for 2019/20. As at 24 March 2020, he had withdrawn $40,000 from his SMSF. Even though this amount was greater than his reduced minimum, he must treat the entire $40,000 as a pension in 2019/20. The remaining withdrawals, valued at $20,000, could be treated as lump sums.

“Had Simon opted to withdraw his benefits in two equal payments, one in December 2019 and the other in June 2020, then only the $25,000 received prior to 24 March 2020 will need to be treated as a pension payment. The entire $25,000 received in June 2020 could be treated as a lump sum because, at the time of the payment, Simon’s reduced minimum had already been paid.”

Were you negatively affected by the government’s change to the minimum annual pension drawdowns in response to the COVID-19 pandemic? Do you think the ATO should treat drawdowns for last financial year differently?

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Written by Ben

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