Minimum pension rise can create cash flow issues
An in-specie payment cannot be made from a pension fund to meet the minimum annual pension drawdown requirements, warns a technical adviser.
Linda Bruce, senior technical services manager for Colonial First State, said most advisers are aware that after four years the temporary minimum pension drawdown relief has come to an end. From this year, the minimum pension requirement has gone back to 100 per cent and this applies to account-based pensions, term-allocated pensions and transition to retirement pensions.
However, some funds may now find they do not have sufficient cash balance to fulfil this obligation.
“Pension payments can only be made in the form of cash, and an in-specie payment can only be treated as a lump sum commutation,” Ms Bruce said.
Essentially what this may mean is that at the end of the year a fund may need to sell off assets if it does not have enough cash flow to pay the pension minimum.
“It’s best to start thinking about this now and not waiting until the end of the year,” Ms Bruce said.
“Obviously, it’s important to review the clients’ investment portfolios and plan ahead. It’s likely that some advisors may be dealing with clients who from this year must take higher pension payments compared with previous years.
“Some clients probably couldn’t afford to reduce their pension drawdown in the past, but many clients could. Where the clients in the past have reduced their pension payments due to the temporary relief, they now must increase their pension payments, potentially the pension drawdown needs to be doubled.”
Craig Day, head of technical for Colonial First State, said advisers will also now need to look at where clients may be able to move the extra income generated from the pension payments.
“One of the things that we might have looked at is contributing these amounts back to super since we’ve no longer got the work test between 67 and 75,” he said.
“If you’ve got a client in that age group, they potentially can take these pension payments and put it back into super but there are some things to consider before doing that.”
Ms Bruce said the first thing to consider is the client’s age.
“If the client is under 75 and they still have other taxable income, the client may want to contribute the excess pension payments back to super and claim a tax deduction for that contribution. Advisers will need to consider the relevant eligibility conditions,” Ms Bruce said.
“For example, if the personal contribution is made on or after the client’s 67th birthday, the client will still have to worry about the work test, otherwise the client is simply not eligible to claim the personal contribution as a tax deduction.
“You also need to consider segregation issues. If a client has met all the rules and put their money back into super, but they failed to move that amount into the retirement phase on the same day, we might have an issue here with the method used to calculate the exempt current pension income for SMSFs.
“Some SMSFs might be using the segregated method by default to calculate the exempt current pension income. If we have a small amount sitting in the accumulation phase just for a short period, the fund may no longer be able to use the segregated method to calculate the exempt current pension income for that entire year.
“The fund then may need to get an actuarial certificate which means more expenses involved.”
Mr Day said in regard to an SMSF, if there is money left sitting in an accumulation account, the member may have to roll back the original pension and then recommence a new pension after picking up the amount in accumulation account, though this would entail extra administration costs and expenses. Alternatively, they could commence a second pension if they were happy to do so.
“Even when we do the pension re-start or even potentially start a second pension, we want to do all that on the same day,” he said.
“If we leave it even for one day, we’ve got part of the fund in accumulation phase for part of the year and potentially, we’re now having to go out and get an actuarial certificate for the fund.”
