“Changes introduced by the simplified superannuation reforms in 2007 meant that after 20 September 2007, any new pension interest commenced in an SMSF was required to be an account-based pension as defined under 1.06(9A) of the SIS Regulations,” he explained.

“This means that a member can no longer commence a new MLP with their accumulation interest in an SMSF, but they can start one in an SMSF using the balance rolled over from the commutation of an existing complying pension such as a defined benefit pension.”

Mr Ellem added that as part of the simplified superannuation reform, MLPs started after 20 September 2007 must also satisfy the minimum pension standards for account-based pensions in addition to the market-linked income payment rules.

“MLPs are payable for a fixed term which is specified at commencement and included in the details of the pension documentation,” he said.

“The member must select a term for the new MLP that is between their minimum and maximum allowable term, the length of which depends on when the pension commenced, the age of the member at that time and whether there is a reversionary beneficiary.”

He noted that this determines the level of pension payments the member must withdraw each year which is based on the balance of the MLP at the start of the financial year and the payment factor according to the SIS regulations.

“The payment factor represents the remaining term of the MLP at the start of the financial year,” Mr Ellem said.

“Many MLPs, like other pensions, would have a start date of 1 July, meaning that the remaining term each year will be a whole number. However, for an MLP that started other than on 1 July, it is slightly different.”

He explained that if the commencement day of the MLP is on or after 1 January, the payment factor is rounded up to the nearest whole year. If the commencement day is on or before 31 December in a financial year, it is rounded down to the nearest whole year.

He gave an example of Harry, who started an MLP on 1 September 2007 at the age of 66, with the term allowable ranging from a minimum of 17 years to a maximum of 34 years.

Harry chose the minimum term of 17 years, meaning the MLP will end on 31 August 2024.

This means that for the 2022–23 financial year, the required pension payment is based on the remaining term, calculated on 1 July 2022 which is two years and two months.

The relevant payment factor from schedule 6 of the SIS Act is 1.90.

“The other relevant factor is the balance of Harry’s MLP at 1 July 2022, which was $285,650, providing an annual pension payment amount of $150,3404 for the 2021-22 financial year,” Mr Ellem said.

“The MLP provisions allow for Harry to take an annual pension amount of up to 110 per cent of the calculated amount.

“Harry decides to take an annual pension amount of $105,00 for 2021–22, keeping him below the defined benefit income cap of $106,2506. This amount is paid to him as one lump sum on 30 June 2023.”

Harry’s MLP balance at 30 June 2023 is $189,220 and he has one year and two months remaining on his term, which is again rounded down to one.

Mr Ellem said the relevant payment factor will be one, meaning the annual pension payment for 2023–24 is $189,220, with a range from $170,298 to $208,142.

“Even though Harry has a range from which to select his annual payment, it will be subject to the available account balance, which is dependent on the timing of pension payments and the net earnings allocated to his MLP,” he continued.

“He could not request an annual pension payment of the maximum $208,142 if there is a lesser amount standing to the balance of his MLP.”

In the final year of an MLP payment, Mr Ellem said the client and their accountant/administrator should be aware of what rules need to be complied with.

“In the case of Harry, he will need to be paid the final amount of his pension within 28 days after the end of the term of the MLP, that is, by no later than 28 September 2024,” Mr Ellem said.

“Harry and his accountant/administrator need to be aware of the balance of his MLP at 1 July 2024 and be able to keep track of pension payments and earnings to ensure that the MLP is fully paid by 28 September 2024.”