Account Based Pensions

An account-based pension refers to a pension where an account balance is attributable to the member. That is, the amount supporting the pension must be allocated to a separate account for each member.

Minimum Annual Payments

You must pay a minimum amount each year to a member from that member’s pension account.

The minimum amount is worked out by multiplying the member’s pension account balance by a percentage factor. The amount is rounded to the nearest 10 whole dollars.

The following table shows the relevant percentage factor based on the member’s age.

Account balance means:

• The pension account balance on 1 July in the financial year in which the payment is made, or
• If the pension commenced during the financial year – the balance on the commencement day, or
• if the amount of the pension account balance is less than the withdrawal benefit that the member would be entitled to if the pension were to be fully commuted – the amount of the withdrawal benefit.

Where the pension commences after 1 July, the minimum payment amount for the first year is calculated proportionately to the number of days remaining in the financial year, starting from the commencement day.

That is, you multiply the minimum payment amount by the remaining number of days in the financial year divided by 365 (or 366 in a leap year).

Minimum payment amount = minimum payment amount x remaining number of days /365 (or 366)

Example

Thomas commences an account-based pension on 1 January 2008 at age 66. His pension account balance on the commencement day is $250,000.

The minimum annual payment amount would be $12,500 (5% of $250,000). However, as the pension commenced on 1 January 2008, the required minimum amount is calculated proportionately from the commencement day to the end of the financial year:

$12,500 (minimum annual payment amount) x 182 (days remaining)/366 = $6215

The minimum payment required for the 2007-08 financial year is $6,220 ($6215 rounded up to the nearest $10).

Certain payments cannot be used to boost a member’s pension

Once a pension has begun the member’s pension account cannot be increased by contributions or rollover amounts, but assets that underpin the members pension can increase the pensions account.

Pension Features

The person commencing this pension must have satisfied a full condition of release to be eligible.  This will in most cases be reaching the age of 65 (this age is rising).  This pension does not have any maximum requirements, so in effect the person with this type of pension can withdraw up to 100% of their member entitlement at any time.

Considerations

People commencing pensions must have the means to withdraw cash equivalents of the pension minimum amounts from their SMSF to satisfy pension minimums.  It is always best to seek professional advice to determine if establishing an account based pension is right in your circumstances.