Avoiding Pension Underpayments - Check that sufficient pension payments will be made!
As Australians navigate an economic landscape where renewed worries about inflation and interest rates have recently dampened consumer sentiment, maintaining a disciplined, long-term perspective on wealth management is vital. While we look to reliable third-party providers like Bloomberg, LSEG Datastream, and the OECD to track broader market data, our house view remains that the Reserve Bank of Australia (RBA) is unlikely to pivot to rate hikes as quickly as the market currently expects.
In this environment, we focus on structured, long-term Australian retirement planning rather than highly speculative, short-term investments. A critical component of this planning is ensuring the administrative health of your superannuation, particularly regarding pension payments as we approach the end of the 2025/26 financial year.
Trustees and members must ensure that each pension account satisfies the "minimum drawdown requirement" before 30 June 2026. Early detection of a likely underpayment allows for corrective action to be taken well before the deadline.
The Minimum Drawdown Requirement
In broad terms, each pension account must satisfy a specific drawdown requirement. If this requirement is not met, the superannuation interest from which the pension is paid will, for taxation purposes, be treated as if it were not in the pension phase for the entire financial year.
The minimum drawdown requirement mandates that aggregate pension payments within a financial year must equal or exceed a set percentage of the pension account balance immediately before the start of that financial year (or on the commencement date, if started mid-year). This percentage is determined by the member's age as of 1 July.
General Case Study: Drawdown Rates for 2025/26
Consider an individual whose pension account balance was $500,000 on 1 July 2025. Their minimum drawdown requirement for the 2025/26 financial year would be calculated as follows:
Under 65: 4% ($20,000)
65 to 74: 5% ($25,000)
75 to 79: 6% ($30,000)
80 to 84: 7% ($35,000)
85 to 89: 9% ($45,000)
90 to 94: 11% ($55,000)
95 or older: 14% ($70,000)
The Consequences of Underpayment
If the minimum drawdown requirement is not satisfied by 30 June, the consequences can significantly impact the tax efficiency of the fund:
Loss of Tax Exemption on Earnings: The superannuation interest supporting the pension will lose its investment earnings exemption. Consequently, the investment earnings generated by that specific interest for the entire financial year will be subject to a 15% tax rate, rather than remaining tax-free.
Reclassification of Payments: Each payment already made during the year will be reclassified and treated as a lump-sum payment. While lump sums are generally still tax-free for those over 60, the tax-free and taxable portions of each individual payment must be separately calculated, often resulting in increased accounting and administration costs for the superannuation fund.
Crucial Steps Before 30 June 2026
Between now and the end of the financial year, it is vital to review pension accounts. Any additional payments required to meet the minimum drawdown threshold must be identified and paid out before the deadline.
Important Operational Rules:
"Accruing" is not sufficient: Simply recording an "accrued" pension underpayment in the superannuation fund's accounts does not satisfy the legal requirement. The funds must actually leave the account.
Payments must be settled: Pension payments must be made in cash or via a completed electronic transfer from the superannuation fund's bank account to the member's personal bank account.
While the Australian Taxation Office (ATO) does possess administrative discretion to disregard minor underpayments—or those deemed beyond the trustees' control—provided the error is promptly rectified upon discovery, it is highly inadvisable to rely on this. The discretion is not guaranteed and may be applied with strict conditions. Proactive management is always the most effective strategy.
For further information, or to book an appointment to ensure your business/trust affairs are in order, give Humble Goode Financial a call on 08 7477 8252 or email planning@hgfp.com.au.
General Advice Warning:The information on this website is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS) or other offer document prior to making an investment decision in relation to a financial product.