by Duc Hong
Account Based Pensions can provide a regular income stream once a member satisfies a condition of release. If the member is over age 65, or has reached their preservation age and retired, the income stream will be treated as a Retirement Phase Pension.
Income and assets supporting Retirement Phase Pensions are exempt from tax. For Transition to Retirement Pensions where the member has reached their preservation age but is under age 65 and still working, the income and assets supporting that pension remain taxable.
Regardless of the pension type, there are a number of important elements to consider when commencing an income stream:
- Documenting pension commencement minutes that should be signed and dated on or before the pension commencement date. Where the starting value of the pension is not known at commencement, we suggest adding a sentence to the minutes that reads “with the total value of my account once known”;
- Whether to nominate a reversionary beneficiary, which is a contractual arrangement ensuring the pension continues to the beneficiary in the event of the death of the primary pensioner. A reversionary nomination removes the trustee discretion and operates outside of the Will;
- Lodging a Transfer Balance Account Report with the ATO by the required due date;
- PAYG reporting requirements:
- The taxable component of any pension payment is subject to PAYG withholding where the recipient is under 60 years of age;
- A PAYG summary and statement need to be lodged with the ATO by the 14th of August following the end of the financial year
- Where a pension recipient turns 60 within a financial year, only the payments received prior to their birthday in that year are subject to PAYG reporting and withholding;
- Centrelink treatment
- Any Account Based Pensions commenced on or after 1 January 2015 are treated as financial assets and deemed under the income test;
- The current deeming rates from 1 July 2020 are 0.25% per cent on assets up to $53,000 for a single and $88,000 for a couple. Amounts above those thresholds are deemed at 2.25%;
- Ensuring the member takes at least their minimum income for the year.
- Where a member fails to meet the minimum, and are not able to rely on the very limited exemptions, the pension is deemed to have ceased on 1 July of that financial year.
- It is recommended to undertake pension reviews in May or June each year to avoid this from happening;
- Where amounts in excess of the annual minimum are to be taken, consideration should be given for the member to provide instructions that the excess is to be treated as a commutation.
While the operation of Account Based Pensions is straightforward, there are many other issues to consider and implement.
We hope all our readers have a wonderful Christmas and prosperous New Year. This is our final article for 2020, we look forward to providing you further articles from mid-January next year.