Once you reach preservation age, you can start to withdraw your super as an income stream, a lump sum or both. These amounts are tax-free provided you take the minimum pension payment.
Why is there a minimum pension payment instead of letting you take what you want? Well, it falls down to the Sole Purpose Test which sets the framework around Australia’s superannuation regulations. Basically, the Sole Purpose Test ensures your pot of super money is used solely for retirement and nothing else.
Once a pension has commenced, the account cannot accept or have money added in through contributions or rollover amounts.
Minimum Pension Rates
The minimum pension payment for 2018-19 are:
|65 to 74||5%|
|75 to 79||6%|
|80 to 84||7%|
|85 to 89||9%|
|90 to 94||11%|
* age at 1 July in the financial year in which payment is made, or the commencement day of the pension
It’s important to note these rates apply to the member’s pension account opening balance and not the total super balance. You may have multiple members or accounts; some in pension phase and others in accumulation phase, you must only apply the rate to the eligible member’s pension phase account.
The minimum annual payment must be rounded to the nearest 10 whole dollars, e.g. if Mary’s pension balance is $1,473,554 and she is 76 years old, we multiply that by 6% which equals $88,413.24, and round it off to the nearest 10 whole dollars which equates to $88,410. If the amount ends in exactly 5 dollars, it is rounded up to the next 10 whole dollars.
Making payments before the EOFY
Pension payment counts only once the recipient has control of the money, in other words, when the amount reaches their bank account. If you’re struggling to make this happen, e.g. it’s 30 June, you can get away with writing a cheque dated 30 June and ensure the recipient has the cheque in his/her hands before the stroke of midnight. Ensure you have the funds available to draw and the cheque is also cashed promptly by the recipient and you will have dodged the ATO bullet.
Commencing a pension during the financial year
It is much simpler to commence a pension on 1 July of the new financial year for accounting purposes. If you start a pension during the financial year, your minimum pension payment will be calculated pro-rata, that is:
Minimum annual payment amount x (remaining number of days ÷ 365) = Minimum payment amount
For example, if Mary’s minimum annual payment amount is $88,410 and her payment commences on 1 January, her minimum payment amount would be:
$88,410 x (182 ÷ 365) = $44,083.89
Rounded off to the nearest 10 whole dollars is $44,080.
It’s important you keep the super fund’s meeting minutes such as a request from the member to commence a pension and a record that the member meets a condition of release. It’s best to speak to your financial or legal adviser for more information on how to correctly address this.
It is important to ensure you pay a minimum pension amount or you could lose the tax-exempt status. For more information, speak to your financial adviser.
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Disclaimer: This post has been prepared for general information purposes only. It is not specific advice to any particular person. You should consult an authorised Align Financial adviser before making financial decisions. Align Financial | Financial Planner Northern Beaches | Servicing North Narrabeen, Narrabeen, Mona Vale, Elanora Heights, Newport, Avalon, Palm Beach | Enquire with us online