Q: I run our SMSF. I wish to retire at 58. I am a little confused about the 4% minimum rule for pensions. Do I have to withdraw 4% of my total accumulation SMSF fund, or do I move some of the assets into a pension fund and then draw 4% a year?
A: You ask a very popular question. The minimum pension payment is based on a percentage of your pension account balance. For some individuals, they may start a pension account with all of their retirement savings. Other individuals may start a pension account with some of their retirement savings, while also running an accumulation account.
The calculation only relates to the pension account. The existence of the minimum payment requirement is linked to the tax concessions associated with super accounts in pension phase. The earnings on your pension account are exempt from tax, subject to withdrawing a minimum amount each year. If you don’t want to withdraw an amount each year, then the only options are to keep your super savings in accumulation phase. or to withdraw the entire super account as a lump sum.
If your savings are in accumulation phase, then any earnings on those super savings are subject to up to 15% earnings tax. In short, the deal for enjoying tax exempt earnings in pension phase, is to withdraw a minimum pension amount each year, in one or more payments.
The minimum pension payment is based on a percentage factor (linked to the age of the fund member) and the account balance of the member’s pension account. The annual minimum payment is calculated on 1 July each year using the percentage linked to your age and your pension’s account balance (see percentage factor table later in the article). The formula is:
Minimum payment = account balance x percentage factor.
You refer to 4% as your percentage factor, which relates
to individuals aged 55 to 64. The full list of pension factors is set out in the table below.
Assuming we’re looking at the 2015/2016 year. and an individual is aged 58, the percentage factor will be 4%. For example, on a $300,000 account balance, the minimum pension amount would be $12,000 (4%) for a 58-year-old.
Transitional relief in earlier years: Due to the Global Financial Crisis (GFC), the federal government temporarily reduced the minimum payments required to be withdrawn each year from superannuation pensions. For example, for the 2012/2013 year, the percent factor was 3% (75% of the normal factor) for someone aged 55, which means the minimum pension amount is $9,000. From the 2013/2014 year onwards, the percentage factors have reverted to normal levels (see table below).
Background: If you take your super benefits before the age of 60, then you can expect to pay some super tax. I explain the tax implications for individuals taking benefits before the age of 60 in the SuperGuide article Retiring before the age of 60: the tax deal. If you are paid super benefits on or after the age of 60, then superannuation benefits are tax-free regardless of whether a fund member takes a lump sum or pension (with the exception of untaxed benefits sourced from certain public sector funds ). A super account in pension phase doesn’t pay tax on investment earnings, including capital gains. The deal with a superannuation pension account enjoying tax exempt earnings (in addition to the member enjoying tax-free super benefit payments on or after the age of 60, or concessionally taxed super benefits before the age of 60) is: a super fund must follow the minimum payment rules. If a pension account doesn’t pay the minimum pension amount, then the tax exempt earnings may be at risk: For more information see SuperGuide article SMSF pension payments: A little bit under is OK .