24/07/2013

Want to make sure that your pension account remains tax-exempt? If so then you need to be aware of the government changes to the minimum payment amounts for pensions effective from 1 July 2013.  

In 2008 the Government introduced a discount which applied to the minimum payment amounts required to be made each year from account-based and term allocated pensions.

From 1 July 2013 however those discounts cease to apply and you will need to make sure that those pesky minimum payment calculations factor in this change.  

The origins of the discount

In response to the downturn in global financial markets, the government provided pension drawdown relief in 2008-09, 2009-10 and 2010-11 by halving the minimum payment amounts required for account based and term allocated pensions.  This relief was then extended in 2011-12 and 2012-13 but was reduced to a 25% discount.  

Effectively the aim of this discount was to ease the investment market difficulties that had been experienced by many Funds.  By allowing Trustees to pay a lower pension amount to a Member the aim was to avoid further draw downs on retirement saving balances or forced sales of fund assets in order to comply with the pension payment rules.

What does it mean now it no longer applies?

The 2013/14 Financial year sees the minimum pension amount for account-based pensions return to normal with the discount now completely phased out.

In future Trustees will need to be aware that the minimum payment amount is required to be paid in full prior to the end of each financial year in order for the pension account to remain as tax-exempt.  

Importance for Pensions in the 2013/2014 Financial Year

Advisers and Trustees should be aware of this change and the potentially higher amount required to be paid or risk breaching the super rules.  

By not meeting the minimum payment amounts in a tax year the pension may be deemed to have lapsed and the Fund will not be entitled to treat income or capital gains as exempt income for that financial year.  This also affects payments that have already been made during the financial year as these may be taxed as lump sum payments, which has significant impacts for the receiving Member.

Why bother worrying about this now, can’t it wait until next June?

While it may not seem pressing to worry about meeting the minimum payment amounts for current pensions until closer to the end of next financial year, Trustees and Advisers should be planning ahead to ensure that the Fund has the necessary resources at hand to make these payments.  

By assessing this now, rather than in June next year, the Fund is given more time to strategically plan how it will satisfy these payments and avoid the end of financial year headache of dealing with a pension that hasn’t met the minimum requirements.

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.