Account-based pensions are a popular retirement income option for many Australians, offering flexibility and control over your savings. However, they come with specific rules and conditions that must be followed to avoid penalties or unintended tax consequences. In this blog, we’ll break down the key rules and what they mean for you.
Minimum Annual Payments
One of the most important rules for account-based pensions is the requirement to withdraw a minimum amount each financial year. This amount is determined by your age and is designed to ensure that the pension is used as a retirement income stream.
Why it matters: If you fail to withdraw the minimum amount, your account could lose its pension status, and the earnings within the account may become taxable. This is outlined in Regulation 1.07D(2) of the SIS Regulations.
Flexibility in Withdrawals:
While there’s a minimum amount you must withdraw, the good news is that you have the flexibility to take out more if needed.
What this means: You can withdraw any amount above the minimum, including the entire balance of your pension, at any time.
Transfer Upon Death
In the event of your passing, your account-based pension can only be transferred to a dependent as defined by superannuation law.
Key point: This ensures that your pension benefits are passed on to eligible beneficiaries, such as a spouse or financial dependents, in a tax-effective manner.
Prohibition on Borrowing
Your account-based pension is designed to provide you with income in retirement, not to be used as collateral for loans.
The rule: You cannot use the capital or income from your pension to borrow funds from any third party.
Commutation Requirements
If you decide to commute (i.e., convert) your pension back into a lump sum, there are specific rules to follow.
The condition: Before any commutation in a financial year, the Trustee must ensure that at least the minimum required pension payment has been made for that year (as per Regulation 1.07D(1)(d)).
No Additional Contributions:
Once your account-based pension has started, you cannot add further contributions or rollovers to the capital supporting the pension.
The rule: Regulation 1.06(1)(a)(ii) of the SIS Regulations explicitly prohibits additional contributions or rollovers into the pension account.
What this means: If you’re still working and contributing to super, you’ll need to maintain a separate super account for those contributions.
What Happens If You Don’t Follow the Rules:
Failing to adhere to these rules can have serious consequences.
For example:
Tax implications: If you don’t withdraw the minimum required amount, the earnings in your account may become taxable.
Loss of pension status: Breaching the rules could result in your account losing its pension status, leading to additional tax liabilities.
Account-based pensions offer a great deal of flexibility and control, but they come with strict rules to ensure they are used as intended. By understanding these rules and planning accordingly, you can make the most of your retirement savings while avoiding costly mistakes.
If you’re unsure about any aspect of your account-based pension, it’s always a good idea to seek advice from a financial professional.
Credits
Sundaram Shanmugam, Smart SMSF Team
