Summary: A saver with superannuation in pension phase may need to withdraw a lump sum, say for a new vehicle or house renovation. If this saver was receiving both the age pension and an account based pension at December 31 last year, taking a lump sum could mean they suffer a reduction in age pension received.
Key take-out: Someone in this situation should find an adviser who can work through the alternatives: taking a lump sum, commuting the current account based pension and commencing a new one, or taking a partial commutation of the current account based pension.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.
Taking extra funds out of a pension account
My wife and I have an SMSF with both accounts in pension phase. We draw super pensions above the minimum amount. We also receive a part age pension. We are both over 70 years.
If we need additional funds, say for a new vehicle or house renovation, can we make a lump sum withdrawal from our pension account without affecting the pension status of our SMSF? I have heard that we would need to partially commute our super pension. If so, how does this occur and what effect would this have on our SMSF and Centrelink age pension?
Answer: The answer to your questions would have been a lot simpler if the changes to how account based pensions are counted under the income test for the age pension were not introduced on January 1, 2015.
Under the changes account based pensions commencing after December 31, 2014 by age pension recipients are counted as a normal financial asset and have the deeming rules applied to the asset value of the pension account.
Under the old rules, that still exist for anyone that was receiving the age pension and an account based pension at December 31, 2014, the amount included under the income test was the net value of the account based pension received.
This net pension received amount was calculated by deducting the purchase cost of the account based pension from the amount of pension received. The purchase cost was calculated by dividing the value of member’s pension account at the time it was commenced, by the member’s life expectancy. Once the purchase cost of the pension is calculated it remains the same as long as the pension is continued and not fully commuted.
For example a male member of a superannuation fund that commenced an account based pension prior to January 1, 2015, with a value of the superannuation account at the time the pension commenced of $500,000, that had a life expectancy of 20 years at the time the pension was commenced, had a purchase cost of $25,000.
In this example if the member was receiving an account based pension of $26,000 a year, after allowing for the purchase cost of $25,000, the amount counted by Centrelink under the income test is only $1000.
If the account based pension had been started by the member after January 1, 2015 the $500,000 value of his superannuation account, assuming that the member had other financial assets that exceeded the lower deeming rate, Centrelink would deem him to earn 3.25 per cent on the value of his pension account of $500,000, resulting in $16,215 being counted under the income test.
Let’s assume that at December 31, 2014 this man and his wife were both receiving the age pension and an account based pension. If this is the case taking a large lump sum pension payment to purchase a new vehicle could result in them suffering a major reduction in the age pension that they both receive.
On the basis that very little of the account based pension that they are receiving is counted as income by Centrelink, due to the purchase cost available to them under the old rules, a $30,000 lump sum pension payment would result in $30,000 of extra income being counted by Centrelink. This would result in a reduction in the age pension for him and his wife of $15,000.
If they were to commute their current account based pensions, take a lump sum to fund the purchase of the vehicle or pay for the renovations, and then commence a new account based pension immediately, their super fund would have effectively remained in pension phase for the whole year and therefore retain the tax free status.
By commuting their account based pensions and starting new ones, this would mean that the grandfathered age pension income test would no longer apply to them. This would more than likely result in a reduced age pension as the revised age pension income rules will apply to the new account based pensions that they commence.
There is a strategy that can be used resulting in a lump sum being taken by a member that is not counted as a pension payment, and the existing pension continues to be paid, and the grandfathered income test allowing for the purchase price to be deducted from the account based pension received continues.
Under this strategy there is a partial commutation of the account based pension, the partial commutation is counted as a lump sum payment and not counted as extra pension income received, and the account based pension continues.
Advice should be obtained before using this strategy is used as a partial commutation will result in a reduction in the purchase price that can be used to reduce the account based pension received.
What you need to do is to find an adviser that can work through each of the three alternatives available to you namely:
- taking a lump sum pension payment to provide the funds required,
- commuting the current account based pension and taking a lump sum then commencing a new one, or
- taking a partial commutation of the current account based pension to provide the lump sum required.
After the calculations have been done by this adviser it will become evident which of your three options will provide you with the best combined superannuation and Centrelink result.
Considering a possible future tax on super earnings
The media reports of an impending tax on super funds in pension mode have me really concerned.
Like many I have followed the rules and put the maximum into super. Alternative strategies in the private investment field have been avoided to take up the generous legislated tax free status.
I am assured by my accountant that any changes to the tax free status will not affect funds currently in place as they would be grandfathered on the basis that retrospective legislation has never occurred before. I hope she is right as a 15 per cent tax on income would cost me very large amounts of money every year. Should I still be worried?
Answer: As the policy to tax superannuation pension accounts that earned more than $75,000 a year was put forward by the Labor party, and if they took this policy to an election they would more than likely not get elected due to its retrospective nature, I think your accountant is correct.
Unfortunately there has not been a statement from the Coalition that they will definitely not introduced retrospective legislation. The main promise that they have made is that no adverse changes would be made to superannuation in their first term of government.
Any subscribers to Eureka Report that are concerned about a possible change of heart by the Coalition about introducing retrospective changes to superannuation benefits, should write to their local member and pose the question to them.
Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.
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