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Taking more than the minimum pension: tips and traps

By Graeme Colley
Executive Manager, SMSF Technical and Private Wealth - SuperConcepts Sydney, Australia

Here, we use case studies to illustrate how to stay compliant and get the right result when taking more than the minimum pension.

Rob is 68 and has just one an account based pension which he’s been drawing since 2017. So far, his living expenses have been met by drawing the minimum pension amount each year. But for the 2019/20 financial year he needs another $20,000 above the minimum. Whatever he draws from his pension will always be tax free to him.

The rules for Rob’s account-based pension require him to withdraw the minimum each year. For someone 68 years old the minimum is 5% of Rob’s opening pension account balance on 1 July 2019 which was $800,000. That means the amount Rob will receive during the 2019/20 financial year will be $60,000 which consists of the minimum pension of $40,000 plus an extra $20,000.

Rob knows that he is required to receive the minimum pension of $40,000 as an income stream but what about the $20,000. There are two ways he could receive the extra $20,000 - as an income stream or he could convert part of it to a lump sum. However the extra $20,000 is treated it will still be tax free to Rob.

What should Rob do?

How to treat Rob’s pension payments over the minimum amount

It is essential that Rob receive the minimum pension amount during the year. If he doesn’t, the pension will not meet the SIS requirements and each payment received by Rob will be treated as a lump sum and no tax will be paid on the amount received. But the downside is that any income earned by Rob’s super fund on investments used to support the pension will be taxed at 15% rather than being tax exempt.

Since 1 July 2017 one of the key changes to super was the introduction of the Transfer Balance Cap (TBC) for pensions. The TBC is the maximum value that can be used to commence a pension and is limited to $1.6 million. Rob probably has no issues with that as his current balance on 1 July 2019 was $800,000 unless he withdrew large amounts from his pension account since it commenced on 1 July 2017. Let’s assume that the amount Rob used to commence his account based pension with was $900,000. This will be the value counted against Rob’s Transfer Balance Account.

Under the way the Transfer Balance Cap rules work, any amount that is taken as a pension payment does not reduce Rob’s Transfer Balance, but if the amount over and above the minimum pension payment is taken as a lump sum, the amount of the lump sum reduces the amount counted against Rob’s Transfer Balance.

If the extra amount Rob requires for this financial year of $20,000 was taken as a pension payment there would be no reduction in his Transfer Account Balance and it would stay at $900,000. But if he withdrew it from the pension as a lump sum it would reduce his Transfer Balance by $20,000 to $880,000.

The main benefit of taking the lump sum is that if Rob was to have contributions made to super and use the amount to start an income stream then a larger amount could be used by Rob up to his Transfer Balance Cap. Examples could include:

  • Rob returning to work and contributions being made to super such as personal or employer contributions. 
  • If Rob wasn’t working he may be eligible to make downsizer contributions to super or after work contributions if he retired in the previous year. 
  • Rob becoming entitled to a reversionary or death benefit pension in future which would allow a greater amount to be counted against his Transfer Balance Account.

The rules for paying pensions requires pensions to be made in cash, however, if a lump sum is made the payment can be made in cash or as an in specie transfer of an investment. Rob may wish to transfer some investments into his name which means a conversion of any excess to a lump sum will come in handy.

Camilla has multiple account-based pension accounts

Camilla has been receiving two account-based pensions (pension 001 and pension 002) and has instructed her SMSF prior to receiving any pension for the financial year that the minimum amount is to be paid from pension 002 as it has a taxable component. From an estate planning point of view this may come in handy if Camilla’s adult children receive a superannuation payment on her death. Pension 001 is made up wholly of a tax-exempt component.

The things to consider prior to electing which pension is to pay any excess are the tax-free proportion of each pension account, any social security grandfathering that may apply (eg for pensions that commenced prior to 1 January 2015 - Centrelink payments or Seniors Health Care cards), whether the pension has been set up with a reversion to a surviving beneficiary and who are to be the nominated beneficiaries for each account.

Zarna has an account-based pension account and an accumulation account

Zarna has an account-based pension account and an accumulation account. This provides her with the option of instructing the trustees of the SMSF prior to an excess being paid whether it is to come from the accumulation account or the account-based pension account.

Any amount paid from the Zarna’s pension account may be treated as a pension payment or a lump sum. If Zarna withdraws the lump sum from her accumulation account rather than the pension account a slightly higher proportion of the fund will be in pension phase. If she decides to withdraw the amount from her account based pension account the considerations will be the same as those for Camilla or Rob.

Considerations that may apply in this circumstance will include, whether there is an unrestricted non-preserved amount in the accumulation account. Also, Zarna should understand that lump sums payments from accumulation accounts will not reduce her Transfer Balance Account but taking a lump sum from her accumulation account may reduce the amount of tax her SMSF pays on earnings.

What are the next steps?

If you decide to take more than the minimum pension amount, you need to consider whether any should be taken as an additional pension payment or as a lump sum. Lump sums can result in a reduction of a person’s Transfer Balance Account which comes with additional pension benefits or the ability to make in specie withdrawals of fund assets.

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Graeme Colley, Executive Manager, SMSF technical and private wealth- Super Concepts
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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.


This article is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.

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