Retirement phase income streams
Payment standards for account-based income streams
The payment standards for account-based income streams cover:
- the minimum annual income payment that must be made
- when the income stream may be commuted in whole or in part
- the circumstances in which the income stream may be transferred to a reversionary beneficiary, and
- the fact that the income stream cannot be used as security for borrowing.
Minimum annual income payments
In order to meet the payment standards, the terms of an account-based income stream must ensure that a minimum income payment is made at least annually.
A fund may choose to impose a maximum payment under its own rules or it may permit any level of income payment in excess of the minimum to be drawn at the choice of the member. The minimum income amount (rounded to the nearest $10) is calculated as shown below.
|Minimum payment for account based income stream (including transition to retirement pensions)
Minimum annual income = account balance x percentage factor where:
Account balance = initial purchase price on commencement of the income stream and account balance at each 1 July thereafter.
Percentage factor = determined from the recipient's age on commencement of the income stream and at each 1 July thereafter.
Minimum income percentage factors
The minimum annual income payment for an account-based pension (including transition to retirement pensions) is calculated as a percentage of the account balance as follows:
Minimum percentage for 2017-18 year
|95 and more||
Pro-rata rule and '1 June rule'
Where an income stream commences part way through the financial year, the minimum income payment is pro-rated based on the days remaining in the year.
Minimum payment = minimum annual payment x remaining number of days in financial year / number of days in financial year
John commences an account based pension on 1 January 2018 at age 67. Initial purchase price is $300,000.
John's minimum annual payment: 5% x $300,000 = $15,000
As John's account based pension commenced part way through the financial year he is subject to a pro-rated annual payment.
Minimum payment = $15,000 x 181/365 = $7,438 (rounded to $7,440)
The '1 June rule' may also apply, which means that no payments are required to be made until the following financial year for an account-based pension or annuity commenced after 1 June in a financial year.
Account-based income streams may be commuted at any time. However, prior to either a full or partial commutation, either a pro-rated minimum income payment must have already been paid during the financial year or the remaining account balance is sufficient to ensure that at least the minimum annual payment could be paid.
Commutations may also be made, regardless of the level of income payments made, to pay a:
- death benefit
- surcharge liability
- family law payment splitting amount
- cooling-off amount, or
- release authority amount.
A full or partial commutation is a trigger event for pensions commenced before 1 July 2007.
Commutations don't count towards minimum payment requirement
Prior to 1 July 2017, partial commutations paid to a member counted towards the minimum payment of an account based pension. From 1 July 2017, partial commutations no longer count towards the minimum payment requirement.
Full commutations don't count towards the minimum payment requirement, regardless of whether the commutation occurred prior to or after 1 July 2017.
Tax treatment of a lump sum payment arising from a commutation
Prior to 1 July 2017, a partial commutation paid to a member was a superannuation income stream benefit for tax purposes, unless they elected, before a payment was made, that the payment was taxed as a superannuation lump sum.
From 1 July 2017, partial commutations paid to a member are superannuation lump sums for tax purposes (although they are still considered income stream benefits for the purposes of determining whether a super fund is able to claim an earnings tax exemption when paying a retirement phase income stream).
Full commutations are always superannuation lump sums for tax purposes, regardless of whether the commutation occurred prior to or after 1 July 2017.
How do commutations affect the social security deductible amount?
Where an individual has an account based pension that is grandfathered for social security income test purposes, they need to decide whether they wish any large one-off cash requirements to be processed as increased pension income or as a commutation, as there is a difference for social security income test purposes.
- If the lump sum is taken as a pension payment, it will be treated as income in the financial year the payment is made, for the social security income test.
- If the withdrawal is taken as a partial commutation, it is not treated as income under the income test. However, it will permanently reduce the income stream's social security deductible amount.
There is no fixed rule as to when a withdrawal should be treated as either a pension payment or commutation for social security; it must be determined in light of the client's circumstances.
Account based pensions that are not eligible for grandfathering are deemed for social security income test purposes, and therefore the choice of pension payment or partial commutation is not relevant for this purpose.
An account-based income stream may be reverted on the death of the recipient only to a dependant of the recipient. See section 14 for more detail on the payment of super death benefits.
Transition to retirement
Transition to retirement income streams are a particular type of account-based income stream that can be commenced with super benefits at any time after the recipient reaches their preservation age.
For further information, see section on transition to retirement income streams.
Last modified: Monday, November 19, 2018