Super pension accounts can be taxed

Each year, the Australian Government requires superannuation account holders receiving an income stream to withdraw at least the minimum pension payment from their super. 

This is known as the minimum pension drawdown or, in Australian Tax Office (ATO) language, “the minimum pension standards’’. 

The minimum amount you must drawdown from your account-based superannuation pension on how old you are. It is determined by set percentage rates and increases as you get older. The ATO has a table here. 

The minimum pension drawdown continues to be controversial. During the pandemic, the government halved the rates. This pleased pensioners who wanted their balances to last longer – mostly those who could fund their retirement in other ways or who downscaled their retirement spending and were concerned that their balances would run out before they died.

In 2024, one of Australia’s largest super funds, Cbus, appealed to Treasury to abolish the minimum withdrawal requirements for retirees with low super balances and make the system work better for Australians who are living longer. 

Cbus said the system was too complex and, as a result, its members whose super balances are lower than the average population were financially worse off. 

However, the government has not moved on this and has retained the pre-pandemic drawdown rates.

When you reach aged 65, or retire and have reached your preservation age and start an account-based pension from your super, you will normally not have to pay any income tax on that pension income. 

But one of the requirements of these pensions is meeting the minimum pension standards. 

Your super fund will calculate your minimum pension drawdown amount at the start of each financial year to ensure compliance with these standards. 

If the required minimum pension amount is not paid in any financial year, the pension fails to meet the minimum pension standards and this has a number of consequences the ATO says this can have a number of consequences:

• The nature of your super income payments will change for that financial year (from income stream to lump sum). This can have significant tax and compliance implications if the pension was a Transition to Retirement Income Stream (TRIS) that wasn’t in retirement phase.
• Your super fund will lose any tax concession on its income it had from the pension.
• For income tax purposes the pension is taken to have ceased at the start of the year. In order to restart it for income tax purposes the pension needs to be ceased, such as by commutation, and a new pension commenced. This will involve revaluations and recalculation of the tax-free and taxable components.
• There could also be Transfer Balance Cap implications.

Under some limited circumstances, an SMSF can continue a pension where the minimum standards haven’t been met.