Having previously discussed how SMSF trustees can position their pension to ensure they're meeting minimum withdrawal requirements, we now turn to those who want to draw down higher amounts.

It is important for trustees to therefore consider how and when they draw an income from the SMSF to ensure the minimum pension standards are met, transfer balance account reporting (TBAR) requirements are met, and tax efficiencies are considered.

Options for taking a benefit payment

There are several ways in which the SMSF trustee can make a payment to a member including:

1. Pension payment from an income stream

  • Must take at least the minimum pension requirement as a pension payment
  • No TBAR required

2. Lump sum payment from a retirement phase income stream

  • Can be in-specie or cash
  • Is a TBAR event and must be reported

3. Lump sum from an accumulation account

  • Can be in-specie or cash
  • No TBAR required

Strategies for source of benefit payments

If you want to draw more than the minimum pension payment from your SMSF in 2019-20, you must decide which interest to make the additional payments from. Some considerations are outlined below:

  • You must draw the minimum amount from the pension as a pension payment
  • If you have an accumulation interest, then drawing down on that interest ahead of the retirement phase income stream may help to increase exempt current pension income (ECPI)
  • If you draw additional funds from the retirement phase income stream, over and above the minimum requirement, then reporting those under TBAR as a lump sum payment will reduce your TBA, increasing the remaining transfer balance cap.

Conversely, if you are retired and want less than the full minimum pension payment – for example if it is currently more than you need to spend in a year – you may consider the following trade-off:

  • commuting part of the balance to accumulation phase at 30 June could reduce the following year’s minimum payment to a lower desired amount
  • which in turn may reduce or remove the excess amount that the member ends up saving outside super which would have future earnings subject to personal tax rates, however, this creates an accumulation interest in the SMSF that will reduce ECPI in future years, and
  • the taxable component of the accumulation interest will increase with earnings which could impact tax payable on future death benefits to non-dependents.

Strategies for timing of benefit payments

A strategy that you may consider where you have both retirement phase income streams and accumulation accounts in the same year is to maintain as high a proportion of the fund in retirement phase as possible, relative to the proportion in accumulation phase, in order to maximise ECPI. Considerations here include:

  • Draw pension payments and lump sums from retirement phase as late in the financial year as possible
  • Draw payments from non-retirement phase accounts as early in the year as possible
  • This strategic timing of payments will be particularly effective for large one-off payments.

Where a fund does not have disregarded small fund assets and has periods of deemed segregation, the fund will use the segregated method for ECPI in those periods.

In this scenario, the timing of pension payments or lump sums in the segregated periods will not impact ECPI, and the timing of payments in any other periods will be helpful in maximising ECPI claimed using the proportionate (unsegregated) method.

Finally, if a member of a fund solely in retirement phase is looking to take lump sum payments, then consider completing the partial commutation and lump sum payment on the same day.

This will avoid creating a day where the fund has an accumulation account, as this could impact ECPI if there is income earned on that day.

Case study: thinking strategically to maximise ECPI

Tim and Kate, both aged 66, have all their superannuation in an SMSF and are retired, with balances and drawdown requirements for 2019-20 as follows:

  • 1 July 2019 balances of $1,412,090 and $820,300 in retirement phase, Tim also has $3,045 in accumulation phase having been subject to the transfer balance cap at 1 July 2017
  • They would like to draw $75,000 from their SMSF over the year
  • Also require an additional $65,000 this year to pay for their daughter’s wedding

Based on this information, payments totalling $140,000 are required in 2019-20.

This includes minimum pension requirements of 5 per cent of the 1 July pension balances which equates to $70,600 for Tim and $41,020 for Kate, totalling $111,620 in 2019-20.

The fund will not have disregarded small fund assets in 2019-20 as neither member had a total super balance in excess of $1.6 million just prior to the start of the financial year.

To maximise ECPI in 2019-20 Tim and Kate considered the following plan:

  • Tim withdrew $3,085 as a lump sum payment from his accumulation account on 2 July 2019 to draw this account to $0 as early in the year as possible
  • The SMSF will be deemed as having segregated pension assets from 2 July 2019 as the fund will be solely in retirement phase. The fund will claim ECPI using the segregated method for income earned between 2 July 2019 and 30 June 2020 (assuming no contributions are received later in the year)
  • They must take $111,620 in pension payments over the year and decide to make regular payments to meet this requirement
  • They will take the remaining $25,295 in payments as pension lump sums once the pension standards have been met and will complete a TBAR for those payments within 28 days of the end of the quarter in which the payment occurred.