Rounding errors flagged with reduced pension minimums
Reduced annual pension entitlements for clients need to be rounded carefully, a technical expert has cautioned, with pension underpayment issues previously arising when the minimum pension requirements were reduced in the GFC.
In March this year, the government reduced the minimum annual payment required for account-based pensions and similar products for 2019–20 and 2020–21.
The 50 per cent reduction in minimum annual payments applies to any pensions with an account-based type of calculation which include account-based pensions, market-linked pensions and allocated pensions.
When calculating a client’s reduced minimum annual payment, SMSF Association deputy chief executive and director of policy and education Peter Burgess said SMSF professionals need to be very careful with the rounding of these amounts.
“We can learn from experience here, when we were coming out of the GFC we did see some quite a number of issues with rounding, leading to clients underpaying their minimum for the year, so just be aware of this one,” Mr Burgess told delegates at the SMSF Association Technical Day.
“When we are calculating the new reduced minimum, the correct way to do it is to start with the pension before the reduction is applied, then times it by 0.5 and round it to the nearest $10.”
Mr Burgess gave an example of a client with an annual pension entitlement of $37,114 before the reduction.
“To apply the 50 per cent reduction, we times it by 0.5 and round it to the nearest $10. What we don’t do is round the $37,114 to the nearest $10 and then times it by 0.5,” he explained.
“If you do that, you would end up with a slightly smaller figure which may result in the fund underpaying the minimum for the year.
“Now, of course, it’s less than 1/12th so they will be able self-assess, but we only get one opportunity to use that self-assessment process, so don’t waste it on this particular situation.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.