Earlier this year, the government passed legislation and regulations to remove the work test from 1 July 2022.
Colonial First State senior manager technical services Kim Guest said this new change has provided new opportunities for people in this age group to make additional contributions to top up their super or implement recontribution strategies for estate planning and spouse equalisation.
“However, implementing a recontribution strategy for clients that have already retired requires careful consideration of a range of issues that could impact the attractiveness and viability of the strategy,” Ms Guest cautioned.
Colonial First State head of technical services Craig Day said that for many advisers, a recontribution strategy is something they think about when the client actually retires and as part of the process of commencing an account-based pension.
“The reason there is as simple as it just simply locks in a higher tax-free proportion,” said Mr Day.
“The new rules provide the opportunity to implement recontribution strategies for clients that have already retired. So, all of a sudden, we’re starting to think about these rules, not in the context of someone that’s just retired and is commencing an account-based pension for them but for someone that’s already potentially been retired for quite a for quite a period of time.”
In these situations, Mr Day said advisers would need to consider a whole range of issues based on the fact the client has probably already got an existing pension running.
“One of the issues that we need to think about are the pension commutation rules that apply. If we’re running an account-based pension, most people will know that they’re fully commutable but that is subject to meeting certain rules. So we need to think about those,” said Mr Day.
“For example, where we’ve got a client that fully or partially commutes an account-based pension, they may be required to receive at least a pro rata pension payment prior to commuting a lump sum for that commutation to be actually be permitted.
“If we’ve got a client who normally received one annual pension payment from their account-based pension in June and they fully commuted their account-based pension on 1 January this year, they would actually be required to take or receive a pro rata payment of approximately 50 per cent of their annual minimum amount prior to commuting their pension for the commutation to actually be permitted.”
Advisers will also need to think about what to do with the recontributed amounts, he said.
“Do we refresh the original pension, or do we start an additional pension so that we’re running two or more pensions compared to just one?” he said.
“For some people, it will also be really important to think about any potential loss of social security grandfathering and any potential reduction of the age pension entitlements that comes from that.”
In the context of an SMSF, Mr Day said SMSF professionals also need to think about the potential tax implications for the fund where part of the income stream is being commuted and money is being put back in, and as part of that process, there are assets being sold to fund the commutation.
