Pensions: Is there an upper limit to how much we can withdraw?

Q: I am aware that the minimum amount of pension withdrawal is normally 4% (for under 65s) of the pension account balance (currently 3% for 2012/2013). Is there now any MAXIMUM amount of pension required to be drawn from a super fund? If not, is this still the case for account based pensions, transition to retirement pensions, allocated pensions and lifetime annuity pensions. The various terms for pension types are confusing.

A: The pension rules are confusing and have changed dramatically over the past 10 years or so. My comments below provide a brief summary of the main pension rules.

You can start a transition-to-retirement pension (TRIP) while you’re still working provided you have reached your preservation age (currently age 55). You must withdraw a minimum amount (4%, based on member being aged at least 55 and being under 65), although for the 2012/2013 year this minimum amount is 3% of the pension account balance. You can withdraw no more than 10% of your pension account each year. If you’re not planning to retire and you’re under the age of 65, then a TRIP is the only pension option available.

You can start a regular account-based pension, subject to reaching your preservation age and retiring, or satisfying another condition of release. The main restriction on an account-based pension is that you must withdraw a minimum amount, and you can withdraw as much as you like. An account-based pension has no upper limit on withdrawals.

If you retired before 20 September 2007, you may be receiving an allocated pension from your super fund. Note that this will only be the case if you run your own super fund (SMSF). All large super funds and financial organisations offering allocated pensions converted such pensions into the more flexible account-based pensions.

If you’re running a SMSF and still receiving an allocated pension from your SMSF, then such income streams are subject to minimum and maximum annual pension payments. You can elect to have the more flexible account-based pension rules apply to this type of income stream. You can find the payment rules for allocated pensions by visiting this link.

If you retired before 20 September 2007, you may be receiving a term allocated pension, also known as a market-linked pension. Such an income stream is payable for a fixed term based on your life expectancy, or until you reach up to 100 years of age. You can’t convert this type of income stream into a lump sum, and your annual income is fixed. This type of income stream was only available for 3 years, and 50% of the value of the pension assets is exempt from the Age Pension assets test.

If you belong to a public sector fund, or a defined benefit corporate fund, or you have purchased an annuity from a financial organisation then you may be receiving a guaranteed income stream from your super fund. The annual income payments are generally fixed, and you may lose your capital if you die. If you purchase an annuity from a financial organisation however, you can usually expect a guaranteed payment period of up to 20 years, or your life expectancy, whichever is the shorter period.

Before January 2006, SMSFs could pay defined benefit pensions, which are lifetime pensions paying a specified amount each year. The attraction of such pensions was the Age Pension assets-test exemption for the value of the pension assets. Some older SMSFs are paying defined benefit pensions and enjoy 50% or 100% assets-test exemption, depending on when the pension was commenced.

You can check with your super fund about the types of income streams (pensions) that are available from your super fund. The ATO website also provides commentary on the types of income streams.