The Account-Based Pension Drawdown Dilemma
Ken is 68, single, and retired. He has $900,000 in an account-based pension and $120,000 in cash outside super. He owns his home and has no debt. His minimum pension drawdown for the year is 5% of his 1 July balance, about $45,000. He also receives a part Age Pension of $180 per fortnight. Ken wants to take only $20,000 this year to preserve capital, and asks whether he can 'just skip' the minimum because he does not need the money. He is also considering withdrawing $150,000 as a lump sum to gift $100,000 to his daughter for a house deposit.
1. Can Ken take less than the minimum pension amount? Explain the consequences and the correct treatment.
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No. Once an account-based pension is commenced, the minimum annual payment (5% at age 68, based on the 1 July account balance) is compulsory. If Ken takes less than the minimum, the fund may lose its tax-exempt earnings status for the year (the pension is treated as failing to meet the minimum standards), and he may face adverse tax and reporting consequences. The correct options are to take the minimum and reinvest the surplus outside super, or to commute (convert) part of the pension back to accumulation phase so the minimum applies only to the remaining pension balance.
He should compare: (a) taking $45,000 and holding the excess in cash or a managed fund; (b) partial commutation of, say, $300,000 back to accumulation, which reduces the minimum to 5% × $600,000 = $30,000 but loses the pension's tax exemption on earnings for that portion. The decision turns on his marginal tax position and the value of the earnings tax exemption.
2. How does taking the $150,000 lump sum and gifting $100,000 affect his Age Pension?
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A lump sum from super is tax-free to Ken if paid from a taxed source after age 60, but it is assessable for social security as it is held. The $100,000 gift is a deprived asset: Centrelink will continue to count it as an asset for five years (or until the daughter's circumstances change), and the gifting free area is only $10,000 per year and $30,000 over five years. Gifting $100,000 in one year therefore results in $90,000 being treated as a deprived asset and counted under both the assets and deemed income tests.
Ken's part pension of $180 per fortnight is likely to be affected: the extra deemed income on the retained and deprived amounts could reduce or extinguish it. He should obtain a Centrelink assessment before gifting, and consider gifting in tranches of $10,000 per year, or lending the money on commercial terms, to manage the deprivation rules.
3. What is the interaction between the pension drawdown and Ken's assessable income?
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Account-based pension payments to a person aged 60 or over are tax-free and not included in assessable income, so the $45,000 minimum does not increase his taxable income. However, the pension balance is deemed for social security purposes (not the actual income), so the drawdown itself does not reduce his pension through the income test; the assets test on the balance does. Taking the minimum and reinvesting outside super converts tax-free pension money into assessable investment income, which can affect both tax and the Age Pension income test. Ken should hold surplus in a tax-efficient structure (e.g. a further non-concessional contribution if eligible, or a low-income investment) rather than a high-yield account.