Account Based Pensions

For an account based pension, also referred to as an allocated pension, a minimum amount is required to be paid each year, with no maximum except for transition to retirement pensions which are limited to 10% of the account balance.

Account based pension minimum payments

Account base pension
The tax exemption available on pension fund asset earnings is crucially dependent on the minimum withdrawal requirements being observed.

The minimum payment amounts have been halved for certain pensions and annuities from 1 July 2008 to 30 June 2011 and reduced by 25% from 2011-12 to 2012-13.

From 1 July 2013 minimum payment amounts were reset to the previous levels.

The age-based withdrawal limits are as follows:

AgeMinimum withdrawal
from 2013-14 onward
Reduced minimum withdrawal
for 2011–12 and 2012-2013
Under 654%3%
65–745%3.75%
75–796%4.5%
80–847%5.25%
85–899%6.75%
90–9411%8.25%
95 or more14%10.5%

Super changes from 1 July 2017

A number of superannuation changes apply from 1 July 2017.

The changes include:

  • a ‘transfer balance cap’ of $1.6 million (indexed to CPI) limits the amount of super which can be transferred from an accumulation super account to the tax-free pension fund phase
    • the indexed amount is proportional to the individual’s amount of available cap
  • once established, pension fund growth from investment earnings in excess of the cap will not breach the cap rules
  • pension fund shrinkage can’t be topped up once the cap is used
  • if the cap is exceeded, tax is payable on the excess
  • CGT relief is available if assets need to be moved back to accumulation fund by 30 June 2017 to comply with the new rules
  • If, on 1 July 2017, you are over your $1.6 million cap by less than $100,000 and you remove this excess by 31 December 2017, excess tax will not apply

In some cases action will need to be taken before 30 June  2017 to avoid excess tax.

See further:

Failure to pay minimum pension – consequences

In the ATO’s view underpaying the minimum pension means that the pension may be taken to have stopped at the start of the income year, and any payments made in the year would then be treated as lump sum payments.

The Tax Office has discretion to allow the pension to continue to be exempt in the case of “small” underpayments which are quickly rectified. A small underpayment is taken to mean not exceeding one‐twelfth of the minimum pension obligation for the year.

Determining ‘Age’

Age is either at:

  • 1 July in the financial year in which the payment is made; or
  • the commencement day if that is the year in which the pension or annuity commences.

The ‘account balance’

‘Account balance’ means:

  • the pension account balance on 1 July in the financial year in which the payment is made; or
  • if the pension commenced during the financial year – the balance on the commencement day

Where the pension commences after 1 July, the minimum payment amount for the first year is apportioned by the number of days in the payment period to the end of the year. If the pension commences on or after 1 June in a financial year, no minimum payment is required that financial year.

Age Pension eligibility – deeming rates

From 1 January 2015 the entire balance in the superannuation fund that is paying an Account Based Pension will be subject to the deeming rates. The new rules apply to people that become eligible for the Age Pension from 1 January 2015. Whilst there are grandfathering provision to protect pre-existing accounts, a change of product can easily trigger the new rules. See further:  Centrelink deeming fact sheet

Further information:

  • Bank accounts which meet the requirement of section 295-385 to be a segregated current pension asset – see Tax Determination TD 2014/7

More on account based pensions

(This information is mainly for complying SMSF funds)

Pensions, or regular income streams, are a form of retirement benefit, and are treated differently for tax purposes from lump sums.

Most funds have the capacity to provide benefits as a pension, or lump sum, or a combination. The individual fund’s rules determine whether, when and how pensions can be drawn. Subject to rules, pensions may also be able to be “commuted” i.e. converted to a lump sum.

The tax rules for complying super funds set age limits and other requirements around starting and stopping the payment of pensions. The tax payable (if any) on a pension income stream depends on when the pension is paid, and the source of the funds.

There are two types of SMSF account-based pension arrangements:

  1. transition to retirement – a pension which can begin while still working. See age requirements and other details here.
  2. account based pension – from age 65, or from after preservation age if retired.

Preservation age

An account based pension can begin before the age of 65 if the individual has reached preservation age and is retired.

The preservation age for an individual depends on their date of birth.

Preservation age based on date of birth
 Date of birthPreservation age
Before 1 July 196055
1 July 1960 to 30 June 196156
1 July 1961 to 30 June 196257
1 July 1962 to 30 June 196358
1 July 1963 to 30 June 196459
After 30 June 196460

Tax payable by the individual on account based pension income

The tax payable (if any) on a pension income stream depends on the age of the individual and the character of pension income – which is either tax free or taxable.

The taxable and tax-free components of the pension income are calculated in the same proportion as those components exist in the super fund.

Taxable funds are those typically sourced from concessional contributions and earnings (i.e. tax deductible, or paid before tax as with salary sacrifice and employer contributions).

Tax-free super funds are non-concesssional contributions for which no tax deduction was claimed and entered the super fund tax free. Typically these are personal contributions paid for by the individual out of after their after-tax income.

Individual’s income tax on pensionsTax ratePension rebate
From preservation age to 59 – tax free component0%n/a
From preservation age to 59 – taxable componentMarginal rate15%
Age 60 and over0%n/a

Tax payable by the super fund supporting an account based pension

The super fund tax rate on income and capital gains is NIL for a complying pension fund in pension phase.

Up to 30 June 2017, this exemption was also available in respect to transition to retirement pensions (for which the individual must not yet be retired) – but was removed from 1 July 2017 along with other superannuation reforms.

In associated changes, from 1 July 2017 a limitation was placed on the value of assets (market value) to be used for account based pensions – the transfer balance cap. The initial cap is $1.6 million, to be indexed annually. See more on the new contributions caps here.

See also

 

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This page was last modified on 2018-12-06