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How to meet minimum withdrawal requirements

As older DIY fund members can attest, commencing a pension with their account balance offers tax benefits. These include the tax-free accrual of income and capital gains and concessional or tax-free (after age 60) pension income. To retain these advantages, however, fund trustees must ensure members receiving a pension withdraw their prescribed minimum annual amount before June 30 each tax year.

The relevant legislation places the onus on members with account-based pensions to ensure they withdraw an amount at least equal to the prescribed minimums (see accompanying table).

Requirements vary

The prescribed minimum is determined with reference to the member’s age and account balance at the start of the year, or the actual start date for pensions started in the tax year. Normal requirements increase from 4 per cent of the opening balance for those aged under 65 to as high as 14 per cent in the oldest age group.

In light of the impact of the GFC on super assets, the government has temporarily reduced the minimum prescribed pension amounts by 50 per cent. In 2011-12, the relief will be only 75 per cent and totally removed in 2012-13.

While determining the size of the minimum annual pension under the formula is a simple calculation, it can be complicated when the fund has multiple pension accounts for members of different ages with new pensions started during the year.

Calculation issues

The technical issues governing the calculations include the following:

■ For existing pensions, the minimum requirement is recalculated at the start of each financial year. The closing balance reported in the previous year is used as the opening account balance.

■ For new pensions started through the year, the calculation for the minimum multiplies starting balance (market value on commencement day) by the prescribed percentage, reduced on a pro-rated basis to cover number of days left in the financial year.

■ DIY fund members are exempt from meeting the minimum payment if a pension commences on or after June 1 in a financial year and special rules apply in a year in which a member dies.

Cash only

Apart from accurately calculating minimums, DIY fund members must also be aware that all payments must be in cash. This is despite the fact that lump-sum withdrawals may be taken via other means, such as off-market transfer of shares.

The fact that such in-specie payments don’t satisfy the minimum requirements complicates the action required by funds making off-market transfers of shares as part of a process for the full depletion or commutation of a pension.

In these circumstances, obtaining the cash needed to pay the pro-rated minimum payment requires the trustees to sell sufficient securities to fund the required pension calculated up to the day of commutation. The remaining securities can then be transferred in specie as a lump-sum payout.

Flexibility

A major advantage of using a DIY fund is the huge flexibility provided in the timing of pension payments. Members who do not require regular pension income are even free to leave drawing their minimum until just prior to June 30. This allows funds to be retained in the tax-effective super environment as long as possible.

To avoid ATO scrutiny, individuals using this strategy need to ensure their payments are transferred into personal accounts and cashed out of their DIY fund account prior to June 30 each year.

Possible delays

This means members receiving pensions via electronic transfer should make allowance for possible delays in transfer. Even though payments made by cheque are deemed “cashed” when members physically receive cheques, the prudent strategy is for the recipient to bank the cheque before June 30.

This avoids having to prove to the ATO that the fund handed the cheque to the member before June 30 and had sufficient liquid cash to meet outstanding cheques.

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