Amongst the actions taken by the Federal Government as part of its economic response to the coronavirus is the temporary reduction to the minimum pension drawdown for accounts-based pensions. This measure provides for a 50% reduction to the minimum pension for 2019-20 and 2020-21.
Since the introduction of the transfer balance cap (TBC) on 1 July 2017, there has been a ‘pecking order’ in how to generally take benefit payments that would exceed the minimum pension. That order being:
- Meet the minimum pension – ensures tax exemption for the relevant income year; then
- Take benefits from any accumulation account – ensures a higher proportion of exempt current pension income (ECPI) as a percentage of total benefits of fund members; then
- Take a partial commutation lump sum – provides a transfer balance debit which may provide ‘cap space’ for either:
- future contributions to move into the retirement phase (e.g. downsizer contribution); or
- an estate planning benefit where any future death benefit received by the member would create an excess transfer balance.
You can read our previous article on this topic for more information:
Re-think required with your SMSF client’s annual pension obligations
When it comes to the rules surrounding ‘what is a valid commutation’, it has been very clear from the Commissioner’s tax ruling, TR 2013/5 and subsequently in PCG 2017/5 that such a decision to commute must be a prospective decision. Failure to document such a decision can render such a commutation invalid and effectively not achieve the intended outcome.
The video that we have include above helps you to understand this further, explaining the importance of documenting this decision and how this can be achieved using documents available on the Smarter SMSF platform.
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