Hello and welcome to today’s edition of Ask Lime where you get to ask technical SMSF questions and we provide the answers.
Today’s question is as follows: I have withdrawn more than the required minimum on my Account Based Pension. What’s the best way for me to account for this?
Now generally, I would say the best thing to do is to treat the excess over the minimum as a Commutation rather than a drawdown on your pension and the reason is that when you treat as a Commutation, it counts against your Transfer Balance Cap. So it gives you more headway if ever you decide to start new Account Based Pensions in the future. There is one thing to consider though, especially in the 2019-20 Financial Year. And that is that if your excess came about as a result of the Government halving the minimum Pension Drawdown requirements, then you can’t just go and back-date the way that you have done things and say “Oh now, I’ve exceeded the minimum and therefore I am going to treat this as a Commutation”.
Now let me give you an example of this: Suppose you start off the year with 1 million dollars in your Account Based Pension. Your minimum drawdown is 5% of that or $50,000. And you withdrew all $50,000 on the 1st of January 2020. And then in March, the Government decided to halve the amount you needed to drawdown from $50,000 to $25,000. So now, you’ve drawn out $25,000 in excess. Well in this situation, you can’t treat that extra $25,000 as a Commutation. And why is that? Because clearly when you drew out the $50,000 on the 1st of January, you weren’t to know that this was an excess drawdown. Had you have drawn the $50,000 out, say in May or June, then that’s fine. You could treat the $25,000 as a Pension Drawdown and $25,000 as a Commutation.
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So that’s the answer to today’s ‘Ask Lime’ question. If you have any questions of this type of technical nature, why don’t you let us know and you might find that we are answering your questions and posting those responses on social media. And if you like to hear more questions like this, then follow us on LinkedIn or subscribe to our YouTube channel.
THIS ARTICLE WAS CORRECT AT THE TIME OF WRITING. SMSF RULES CHANGE OVER TIME AND THE ARTICLE MAY BE LESS RELEVANT IN THE FUTURE.
Greg Einfeld has over 20 years’ experience in the Australian Superannuation and Financial Services industry. He has MEc and MBA degrees, is a licensed financial adviser, a qualified actuary, and specialises in Self Managed Super Funds (SMSF’s). He regularly presents on a variety of SMSF topics including investment, tax, estate planning, pensions, administration and strategies.