Pensions / SMSF / SMSF Compliance / Trustee education

Has your minimum pension increased by 86% for the financial year?

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Whilst much of the attention has focused on superannuation reforms in recent times, 1 July 2013 has seen the re-introduction of the ‘normal’ minimum pension levels for those drawing income streams.  For five years throughout the global financial crisis (GFC), the Government provided much-needed relief for pensioners with a 50% reduction initially in the minimum pension levels, and more recently with a 25% reduced minimum.  However, with financial markets showing positive returns for the 2013 financial year, this temporary measure appears to have run its course…

For some individuals, the increase in the minimum percentage (%) factor, plus positive investment returns will see a sizeable increase in the amount of pension to be withdrawn for the current financial year.  With the ASX All Ordinaries achieving a 15.47% rate of return for the financial year, this along with a 25% increase in the minimum pension is likely to catch a few trustees by surprise.

Let’s take a look at a couple of examples below to show how pensioners can get caught with these large increases:

Example 1

Craig (64) has an account based pension of $600,000.  He takes the reduced minimum pension for 2012-13 of $18,000 (3%).  Craig’s SMSF has performed well for the financial year, achieving a 15% rate of return, with his account balance at 30 June 2013 now at $670,000.  As Craig turned 65 during the financial year, his minimum percentage has increased to 5% for the 2013-14 financial year (he has jumped up an age bracket as well – see table below) .  Therefore, his minimum pension is now $33,500, representing an 86% increase on the previous year!!

Example 2

Helen (79) has an 3 different account based pensions totalling $2,500,000.  Her minimum pension for 2012-13 was $112,500 (4.5%).  During the financial year, the fund achieved a 20% rate of return, with Helen’s account balances growing to $2,887,000.  Her revised minimum pension for 2013-14 is now calculated on 7% of her account balance, requiring a withdrawal of $202,090.  This represents an approx. 80% increase in Helen’s minimum pension obligation.

This might not be a problem for many income stream recipients, however it may cause concern for some who need to liquidate assets to meet the minimum pension obligation.  In some respects, the larger the member’s super balance and the older the pension member, the potential for liquidity problems to arise.

Whatever the case, it is important that you understand your revised minimum pension obligations as early as you can for this financial year.

NB. I’ve included the minimum pension percentages below for 2013-14.

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