GFC and Pensions

While the Government has for the current financial year halved the minimum pension limit for account-based and transition to retirement pensions what if the fund cannot pay the reduced pension limit?

For an account-based pension payable to a member who is under age 65, the minimum pension limit is 2% (would be 4% but for the relief).

If the fund is only able to pay pension payments equal to 1% of the pension account balance will the fund be in danger of losing its compliance status?

The fund is unlikely to lose its compliance status.  A breach of an operating standard (such as failing to pay the minimum pension amount) must be intentional or reckless in order to permit the ATO to issue a non-compliance notice.

If the Global Financial Crises has prevented the trustees from satisfying the minimum pension requirement, this will generally mean that there was no intentional or reckless breach of the operating standard.

However, the pension will not satisfy the definition of an income stream and so pension payments will be taxed as a series of superannuation lump sums rather than pension payments.  Consequently the fund will not be entitled to the pension income exemption.

If the pension is a transition to retirement pension then each pension payment made to the pensioner before an unrestricted release condition has occurred (eg attaining age 65 or being retired) will be treated as an unauthorised superannuation lump sum and the taxable portion of each payment taxed at the pensioner’s marginal tax rate.  The ATO does have discretion to modify this tax treatment of unauthorised benefits if circumstances warrant such special treatment.