What are the different types of pensions?

Before the passing of the Fair and Sustainable Superannuation bill in November 2016 there was only one difference between the two types of pensions, or income streams as they are known in tech speak, that an SMSF can pay. They are Account Based Pensions (ABP) and Transition To Retirement (TTR) pensions.

Both of these pension accounts received the same tax benefit of the income earned to support the pension not being taxed. As a result of the changes there is now a clear difference between pensions paid when a member has met a condition of release that is not the transition to retirement pension condition of release.

From July 1, 2017 where the condition of release allows a person to receive an account based pension they will be receiving a superannuation income stream. Only superannuation income streams from July 1, 2017 will receive the benefit of having the income earned to support the pension not being taxed.

Just as there are two types of pensions there are two types of account based pensions namely a non-reversionary ABP and a reversionary ABP. Under a reversionary ABP upon the death of the member the pension automatically transfers to their spouse. Under a non-reversionary ABP it ceases upon the death of a member, but the spouse can still be paid a death benefit pension effectively resulting in the pension continuing. 

Prior to the introduction of the current super system members were forced to take a pension once they reached 70 years of age. Now a member can remain in accumulation phase for as long as they want.

There are three standards that each pension must meet, with the TTR pension having one extra standard. The common standards require:

• the pensions to be paid at least annually at a minimum rate depending on a person's age,
• no amount or percentage of the pension can be prescribed as being left-over when the pension ceases; and
• the pension can only be transferred on the death of the pensioner to either a dependant or as a lump sum to their estate.

The minimum pensions that must be paid differ depending on broad age groups. As the member gets older and another age group applies they are required to take a higher minimum pension.

In addition to the income earned to support a TTR pension being taxed there is an extra standard that applies to TTR pensions. Unlike ABPs that have no maximum limit on what can be withdrawn, TTR pensions have a maximum limit of 10 per cent that can be paid as a pension. TTR pensions can therefore be paid at somewhere between the minimum pension rate, and up to 10 per cent of the total value of the member's account balance.

Meeting the minimum pension payment requirement

The minimum pension payable is calculated by multiplying the value of a member's super pension account balance at the start of each year, or the balance of the member's account when the pension commences, by the percentage shown in the following table:

Guidance notes were issued by the ATO during the 2013 financial year that clarifies when a super fund fails to meet the minimum pension requirements. The tax effect of an SMSF not meeting the minimum pension requirement is disastrous. This is because the fund is not regarded as being in pension phase and therefore loses the tax exemption on income it earns.

The guidance notes issued by the Commissioner of taxation details when he will use his powers of general administration (GPA) when assessing whether a super fund fails to meet the minimum pension requirements.

In general terms trustees can self assess when there has been a small pension shortfall or where the failure to take the minimum was outside the control of the trustees, and the matter is rectified as soon as practicable after the shortfall has been identified.

However for SMSF trustees to self assess the following four conditions must be met:

• The failure to meet the minimum pension requirements was an honest mistake or was outside the control of the trustees; and
• the underpayment is only small (that is, does not exceed one-twelfth of the minimum annual pension payment); and
• all of the other GPA conditions have been met; and
• the trustee has not previously been granted the Commissioner's concession for failing to meet the minimum requirements.

You could be forgiven for thinking that these guidance notes make it clear that where an account based pension is paid as a lump sum at the end of a financial year, and a member dies during that financial year, the trustees will not be able to self assess and therefore the pension income stream requirements will not have been met. In actual fact this is not the case.

The ATO has confirmed that if a member dies before they have received an annual pension payment, which often occurs at the end of each financial year, the minimum pension payment standard is not applied.

Also in an example on its website, explaining when a super fund does not meet the minimum pension payment standard, the ATO states that in the event of the death of a member it will not require a minimum pension payment to be made in the year the member dies.