Login
Recession calls for ‘plan B’ pension drawdown strategy
As a recession becomes all but guaranteed due to the economic effects of COVID-19, a law firm has put forward a back-up pension drawdown strategy to buffer against nosediving investment values.
The Australian government temporarily reduced the standard minimum pension payments by 50 per cent for the 2019–2020 and 2020–2021 financial years as part of the economic stimulus package.
|
Age |
Default minimum drawdown rates (percentage) |
Reduced rates by 50% for the 2019–20 and 2020–21 income years (percentage) |
|
Under 65 |
4 |
2 |
|
65-74 |
5 |
2.5 |
|
75-79 |
6 |
3 |
|
80-84 |
7 |
3.5 |
|
85-89 |
9 |
4.5 |
|
90-94 |
11 |
5.5 |
|
95 or more |
14 |
7 |
In a blog, Jonathan See of Townsends Business & Corporate Lawyers said that when the values of investments made by the SMSF in the financial markets have nosedived because of the pandemic, the trustee is pressured to sell assets to pay the minimum pension amount without allowing time for the investments to recover in value.
A pension drawdown example strategy
Mr See puts forward the example of Gino, who is 65 years of age and is the sole member of Gino Superannuation Fund.
On 1 July 2019, the fund commenced an account-based pension with initial pension balance of $1.5 million, with annual pension amount for the first financial year specified as $75,000.
As a result of the pandemic, the performance of the fund’s investments has been significantly affected and there is insufficient cash to pay the annual pension amount.
Mr See said some governing rules or pension documentation may be inflexible and require amendment for application of the new regulatory minimum to your pension.
“If Gino wishes to take advantage of the reduced minimum pension rates, he should have the governing rules and the relevant pension documentation reviewed to check the current annual pension amount and determine whether any variation is required to the governing rules and/or the terms of the pension,” he said.
According to Mr See, once the regulatory minimum pension amount effectively applies to the pension, the new minimum pension amount for the 2019–2020 financial year is $37,500.00 ($1.5 million x 2.5%) instead of $75,000.00 ($1.5 million x 5%).
He said this is good news if the fund is struggling to have the cash to pay the standard minimum pension amount to Gino.
“As Gino only needs to withdraw a lesser amount to comply with the SIS regulations, the fund will not need to sell its assets to pay the standard minimum pension amount,” Mr See said.
“If Gino had already withdrawn an amount equal to the new minimum pension amount, he can stop making further withdrawals from the pension account.
“If he withdrew more than that before adopting the new minimum, he cannot put the excess amount withdrawn back to his super account unless he is eligible to make super contributions and meets the contribution requirements.”
With proper documentation, Mr See said it is possible to prospectively treat any payment in excess of the applicable minimum pension amount as a cashing out of a superannuation lump sum (i.e. by way of partial commutation of the pension).
However, he warned that the trustee must be cautious not to retrospectively change the nature of any past payments.
“If, for example, the fund paid Gino $50,000 as a pension on 1 January 2020 and subsequently varied the trust deed and the pension terms on 1 April 2020 to change the annual pension payment amount to the regulatory minimum amount as per Schedule 7 of the SIS Regulations, then the $12,500 in excess of the new minimum cannot be treated as a lump sum payment arising out of a partial commutation of the pension,” Mr See said.
“If, however, the fund has $50,000 cash available for distribution after adopting the reduced minimum pension rates, Gino can request payment of $37,500 (minimum pension amount) as pension and the balance of $12,500 as a lump sum payment arising out of a partial commutation of the pension. This will create an additional unused transfer balance cap of $12,500.
“Legal review of the deed and pension documents will be necessary as some deeds and pension terms may have more restrictive cashing-out conditions than the SIS regulations.”
Adrian Flores
Adrian Flores is the deputy editor of SMSF Adviser. Before that, he was the features editor for ifa (Independent Financial Adviser), InvestorDaily, Risk Adviser, Fintech Business and Adviser Innovation.
You can email Adrian at adrian.flores@momentummedia.com.au.
What if Gino only has a property in the SMSF and has had to reduce rent due to COVID-19. He may also have significant cash and other assets outside super to satisfy the "most basic fundamentals" of diversification.0- If Gino has $1.5m but cannot generate $37,500 in a tax free environment he is doing something wrong0
- In this example, Gino would have to be a farmer in a small country town, as from experience they are the most obtuse, ignorant, arrogant, peasant mentality trustees that won't accept good advice let alone investment advice and therefore consistently make dumb decisions - hence I have no trouble believing he'd not be able to make the minimum pension.0
- That sort of talk adds nothing of value.0
- Any competent and compliant financial adviser would understand that Gino may be risk adverse and as such may only be interested in capital guaranteed investments. Finance 101 and basic calculation using the CAPM demonstrates that an adviser complying with the law and his client's best interests may find it difficult to generate a capital guaranteed income of $37,500 on $1.5million in current economic conditions. It is unfair for the government to assist on current deeming rates when the RBA has the offical cash rate at 0.25%p.a. - the deeming rate should be linked to the RBA benchmark by policy.0
- Gino is ultimately the trustee and responsible for investment decisions. On one hand he wants the tax benefits of being in the tax free pension environment, and he should also be accountable for liquidity. If he had sought quality accounting/advisory advice Gino shouldn’t be in this predicament. Diversification is one of the most basic fundamentals that should be at the foundation of any sound financial plan. Bad luck Gino - If you have been guided into this situation time to change advisers
0
Subscribe to the
BULLETIN
Get the latest news and opinions delivered to your inbox each morning
Subscribe
