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SMSF Income Streams - Priority of cashing of benefits & other options

Thursday, 08 August 2013 00:00

This technical article explores the priority of cashing of benefits and other options through a practical scenario.

Bryce has turned age 55 and has decided to commence a Transition to Retirement Income Stream (TRIS). He has a balance of $400,000 in the accumulation account in his SMSF, and he decides to apply the total amount to commence his TRIS.

As a result of commencing contributions to superannuation at an early stage in his working life (he is still with the same employer he commenced with after leaving University), Bryce’s balance of $400,000 is comprised of each of the 3 separate preservation components, namely:

Unrestricted non-preserved benefits

$65,000

Restricted non-preserved benefits

$50,000

Preserved benefits

$285,000

To meet his lifestyle needs, Bryce has calculated he will need slightly more than the minimum pension, which would be $16,000 ($400,000 @ 4%) in the 1st year, so he has asked the trustee of his SMSF to pay him $20,000 for that year.

Over the next 3 years, Bryce draws $21,000, $23,000 and $25,000, respectively. Those amounts were within the minimum and maximum limits for a Transition to Retirement Income Stream each year.

At the end of the 4th year, when Bryce has turned age 59, he decides to draw $25,000 for his living expenses. He intends also to draw extra funds to purchase a new car and take an overseas trip. Bryce estimates that the total cost of both the car and the holiday will amount to $40,000. The combined amount will significantly exceed Bryce’s maximum payment limit under the terms of his Transition to Retirement Income Stream.

He recalls being told that he could access his unrestricted non-preserved benefits from his super at any time, so he plans to use part of his $65,000 balance of that component to meet his extraordinary expenses.

Much to his horror, Bryce’s accountant tells him that his unrestricted non-preserved balance has gone.

She explains to Bryce that the SIS Regulations have what is referred to as a ‘priority of cashing of benefits’ and that benefits must be cashed (paid out) in the following order:

  • firstly, unrestricted non-preserved benefits;
  • secondly, restricted non-preserved benefits; and
  • thirdly, preserved benefits.

Therefore, at the end of the 4th year, after payment of $89,000 in pension payments, the components of Bryce’s pension account are:

Unrestricted non-preserved benefits

$65,000 - $65,000 = Nil

Restricted non-preserved benefits

$50,000 - $24,000 = $26,000

Preserved benefits

$285,000 -

0 = $285,000

(Note: income will be added to the preserved benefits balance)

How could Bryce have structured his income stream differently to allow him to take the $40,000?

If Bryce was to change jobs, his restricted non-preserved benefits would become unrestricted, meaning he would have access to the $26,000 detailed above.

If he changed jobs after turning 60, the preserved benefits would also become unrestricted, as he would have met a condition of release in each case.

However, that is not a feasible solution for Bryce, who has worked for the one employer his entire career and who he expects to be with at retirement in 6 years’ time.

Therefore, Bryce is limited to receiving the maximum payment amount under the terms of his Transition to Retirement Income Stream, which is significantly short of his desired amount.

What could Bryce have done differently?

Bryce could have commenced either 2 or 3 separate pensions.

Option 1 – commence:

  • 1 x Account-Based Pension using the unrestricted non-preserved balance of $65,000; and
  • 1 x Transition to Retirement Income Stream using the restricted non-preserved balance ($50,000) and the preserved balance ($285,000); or

Option 2 – commence:

  • 1 x Account-Based Pension using the unrestricted non-preserved balance of $65,000; and
  • 1 x Transition to Retirement Income Stream using the restricted non-preserved balance of $50,000; and
  • 1 x Transition to Retirement Income Stream using the preserved balance of $285,000.

 

 

What happened ($’000)

Option 1 ($’000)

Option 2 ($’000)

 

U

R

P

U

R

P

U

R

P

Start

$65

$50

$285

$65

$50

$285

$65

$50

$285

Year 1

-$20

   

-$2.6

-$17.4

 

-$2.6

-$2

-$15.4

Year 2

-$21

   

-$2.5

-$18.5

 

-$2.5

-$1.9

-$16.6

Year 3

-$23

   

-$2.4

-$14.1

-$6.5

-$2.4

-$1.8

-$18.8

Year 4

-$1

-$24

 

-$2.3

 

-$22.7

-$2.3

-$1.8

-$20.9

End

$0

$26

$285

$55.2

$0

$255.8

$55.2

$42.5

$213.3

Legend: U = Unrestricted non-preserved, R = Restricted non-preserved, P = Preserved

Note: for the purposes of the exercise, it is assumed that no income was received by the SMSF.

Under each of the 3 scenarios in the table above, the total balance remains the same, whilst the balance of the specific components varies significantly.

Had Bryce proceeded with either of Options 1 or 2, he would have had sufficient unrestricted non-preserved funds available for his immediate access.

Because he was drawing an amount in excess of his minimum pension requirements, Option 2 would have allowed him to apply the higher amount against the preserved balance, maintaining a lower drawdown of both his unrestricted non-preserved and restricted non-preserved balances.

Important outcomes

The lesson for Bryce from the exercise is that some forward planning and consideration of the available options, would have proven to be beneficial.

The access to funds, when it is required, can significantly outweigh the expense of creating and operating more than one pension in a SMSF.

Please note this article is for information purposes only and does not constitute legal advice. Should you have any queries or require more information, please contact the team at Topdocs on 1300 659 242.

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