Ending of pension discount - impact on reverting to 100% rate and crossing age band

The silence of the Government ...

The silence of the Government to the continuation of the 25% discount of the minimum pension drawdown amount is deafening.

With less than two weeks to the end of the financial year, there has been no announcement from the Government that the 25% discount will continue.

Consequently, from 1 July 2013, the minimum pension limit will be determined by applying the normal percentages of 4% (if under age 65 at 1 July 2013) or 5% if aged 65 or more at 1 July 2013 but less than age 75.  Greater percentages apply for those aged more than 75.

The impact of the removal of the discount could impose a significant cash flow issue for many super funds - particularly where the relevant member has crossed an age band threshold.  For example, a member who enjoyed a 4.5% minimum drawdown rate for 2012/13 will, if they attained age 75 before 1 July 2013, now have a minimum drawdown rate of 6%.  For members who attained age 65 after 1 July 2012, they will move from a 3% drawdown rate (for 2012/13) to a 5% drawdown rate (for 2013/14).

While the 1 July 2013 account figures may not be known until the financial statements for 2012/13 financial year are finalised in early 2014, advisers should consider whether the minimum drawdown amount for 2013/14 should be estimated by applying the minimum drawdown percentage applicable to the 2013/14 financial year to the estimated pension balance at 30 June 2013.  This action may help to plan the cash flow requirements of the fund for the 2013/14 financial year.

Now is not the time to do a Blanche Dubois

While the ATO has, by administrative fiat, granted a concession for minor pension underpayments (ie underpayment by one monthly pension payment), it is better not to rely on the ATO.  Unlike Blanche Dubois, it is better not to rely on the kindness of regulators.

Ideally, advisers should conduct a review of the pension in April or May to identify any underpayments (and, in the case of transition to retirement pensions, overpayments) to permit corrective action to be taken before 30 June.

Corrective action for any pension underpayment or overpayment is better undertaken before 30 June than after 30 June: even correction action taken at the last moment of the financial year, is better than after 30 June.