Meg Heffron, director of Heffron, said at the recent ASF Audits technical seminar that it pays to look at what will happen to the exempt current pension income of individual members before deciding to commute a market-linked pension.
“It matters where your client is on the curve and where they’ll be during the five-year amnesty. For a lot of clients, there are some fairly simple sums to do to work out how much they will be able to keep in pension phase if they switch off their market-linked pension,” Heffron said.
“If it’s zero, which will be the case for many people with very large balances, then basically what you’re weighing up is they lose ECPI, but stop paying tax on their pension payments. Weigh up also whether they lose ECPI, do they want to leave [commuting] for a couple of years. The amnesty is five years, so there is time to perhaps sell some assets.
“Maybe they may also realise some capital gains while they’ve still got this very high ECPI, and can worry about winding up their market-linked pension in a couple of years.”
Heffron continued that if a member is at the “end of the curve” (close to the end of their pension’s pre-determined term) where they are starting to pay a lot of tax on their pension payments, they might decide to commute their market-linked pension urgently. At this point, pension payments are a very high proportion of the account balance, drawing down that balance very quickly so their ECPI is rapidly getting less in any case.
“Althernatively, the trigger may be they need more money, and want to take money out of super or they just need more income, in which case that would be a trigger to use the amnesty and commute the market-linked pension.”
“The key point is that it is complicated. You always have to have one of your most senior accountants looking at these because they’re the only ones that are old enough to remember how they worked, and they’re easy to get wrong,” she added.
“Which is why a lot of us are very keen to wind them up. We know clients don’t really understand them, and they don’t like them because they’re inflexible and so we’re all in a hurry to wind them up. But there might be some things we want to do first that might mean we don’t use the amnesty right this second, and maybe use it in 2027 or 2028.”
If the decision is made to wait, any commutation application has to be submitted before December 2029 – and this is essential to remember.
“Also remember that the amnesty only applies if a client is fully commuting their market-linked pension,” Heffron said.
“There is also a problem with the other common type of legacy pension, the complying lifetime pension, and that is a sudden increase in a member’s total super balance if they switch off a complying lifetime pension now. That was fine for people who did all this before 30 June 2025, because what we care about is not so much how much the total super balance is, but we do care about that first-year impact of a sudden uplift in their TSB, which looks likely to flow through to earnings for Division 296 tax purposes.”
Heffron said members who have not switched off their complying lifetime pensions yet are in a “very tricky” situation where they don’t really know if they will also be affected by Division 296 tax if they switch off their pension now.
“It’s definitely something to think carefully about before you decide to do it. Pre-30 June 2025, the situation was different. It did result in a big increase in TSB if they switched off their lifetime complying pension and got all that money allocated to them, including all of the reserves, but it didn’t impact earnings for Division 296 tax, because it didn’t exist.”
