Most retirees with stashed-away super will take out a pension at some point in their retired lives because of the tax benefits of doing so. The choice is simple: Either retain your money in super and cop 15% tax on your investment earnings every year; or transfer your super to a pension and pay zero tax on investment earnings and capital gains? Indeed, pensions are the way to go because of the tax savings.
Pensions are designed to regularly spit out money to fund living expenses, in a sense to replicate the old salary during the working life that used to cover food, utility and entertainment costs. Depending upon the pension you choose, however, there are restrictions on the minimum amount that you can withdraw each year. And if you withdraw the wrong amount, the ATO can come down on you.
Account-based pensions replaced the old allocated pensions. The major difference between the two products is that account-based pensions have no restrictions on the maximum amount that you can withdraw from the fund; the old allocated pensions had an upper limit on how much you could withdraw. TRIPs, or transition-to-retirement-pensions, also have a maximum amount that you can withdraw each year, at 10% of the account balance.
Some retirees stuff up by treating a pension like an ordinary savings account; they’ll withdraw money at will with little regard to the rules. The problem is, if they withdraw too much, or not enough money each year, they can contravene the laws set down by the ATO.
Account-based pensions let you withdraw as much money as you like each year, provided that you withdraw at least something. So how much do you need to withdraw? This is an important question because you must ensure that you at least meet this amount each year.
The calculation that you need to be familiar with is:
Minimum Payment = Account Balance x Percentage Factor
|Age of Beneficiary||Percentage factor||2011-2012|
|65 to 74||5%||3.75%|
|75 to 79||6%||4.5%|
|80 to 84||7%||5.25%|
|85 to 89||9%||6.75%|
|90 to 94||11%||8.25%|
|95 or more||14%||10.5%|
Basically, at the beginning of each financial year, starting on 1 July, you multiply your account balance by the percentage factor that relates to your age. If you’ve just started the pension, then the account balance at the commencement of the product is used. So let’s say that you’re age 66, and you have $500,000 at 1 July 2011.
For the 2011-2012 financial year, the percentage factor used has been reduced by 25%, but will revert back to the old factors next financial year. The table above includes the reduced 2011-2012 financial year.
So for this current financial year, 2011-2012, the minimum amount that a 66 year old with an account balance of $500,000 must withdraw is = $500,000 X 0.0375 = $18,750
So what happens if the retiree takes out $10,000 instead?
Well this is what the ATO calls a contravention of the rules of the fund.
The SMSF fund auditor, usually an accountant, may or may not report the offense to the ATO. Whether they do or not depends on guidelines set out by the ATO; for example, if the value of all contraventions is greater than 5% of the fund’s assets, then it must be reported to the ATO; or if the value of all contraventions is greater than $300,000 it must be reported. For new funds (less than 15 months old), if the value of any single contravention is greater than $2,000 then it must be immediately reported.
In the example above, since it’s a relatively small amount, and presupposing that the retiree has not made mistakes in the past, then it’s likely that the fund auditor would not report the contravention to the ATO. Nevertheless, it often comes down to the professional judgement of the fund auditor. If, however, the pension was set up just this financial year, then the fund auditor has no choice but to notify the ATO of the breach.
This article is for general information purposes only. TheBull recommends that readers seek investment advice before making any decisions.