While the issue of SMSF members meeting their minimum pension payments has received much attention since the new super rules commenced, the overpayment of pension income is equally as crucial an area to monitor, a specialist industry law firm has warned.
“The problem is succinctly this: any pension payment above the minimum is going to diminish your pension capital without a corresponding restoration of your cap space,” DBA Lawyers senior associate William Fettes said.
“Even though the transfer balance cap system started life as a balance cap – it tested everything that was tax-free, retirement phase immediately before 1 July this year – now that we’re in the regime, it’s actually a transfer cap so it only tests inputs and outputs, or static credits and static debits where fluctuations in market values and balances is not going to affect that.
“It’s truly its namesake, ‘transfer balance cap’.
“This means that pension overpayment is actually a risk and it does need to be carefully managed.”
Fettes said a realistic outcome of this risk was capital erosion over time.
“That just means where ordinary pension payments are made above the minimums, slowly we are reducing our pension capital,” he noted.
“And if we keep paying above our minimums, it will get out of whack and the only way to deal with that is through compensatory growth.”
He pointed to the Class “June SMSF Benchmark Report”, which found the average SMSF pensioner withdraws about $74,000 annually over a series of 12 transactions.
In addition, the average SMSF pensioner overdraws $24,000 above their minimum, or 32 per cent of their average annual payments.
“That’s quite interesting because it does indicate that this is a real problem, at least with the current behaviour, so if it were to continue for most clients this is going to be an issue,” Fettes warned.
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