In a recent blog post, Heffron senior SMSF specialist Alex Denham said the Treasury Laws Amendment (2019 Measures No. 3) Bill 2019 would ensure there was a debit to a fund member’s transfer balance account if they commuted their market-linked pension, meaning many members would not have to avoid commuting these types of pensions in the future.
“Under current law, a market-linked pension that commenced prior to 1 July 2017 is considered a ‘capped defined benefit income stream’ and the ‘value’ of the pension for the purposes of the transfer balance cap is derived from a formula rather than the underlying assets,” Ms Denham explained.
“Sometimes a member might wish to restart a market-linked pension, either in the same fund or by rolling to a new fund. There are several reasons for doing this, including to reset the term and therefore change the pension amounts, or to add or remove a reversionary beneficiary, or simply just to move to a different provider, perhaps wishing to wind up their SMSF.”
However, Ms Denham noted when these types of pensions were commuted and restarted, they no longer counted as capped defined benefit income streams, meaning the credit was counted the same as for account-based pensions and the member then had two transfer balance credits.
This risked the member breaching their transfer balance cap, she explained.
“As market-linked pensions cannot be commuted and either rolled back to accumulation phase or paid out as a lump sum, there is currently no means of removing any excess,” Ms Denham said.
However, the new bill allowed holders of these pensions to deduct a debit which was equal to the total of pension payments drawn from 1 July 2017 to the commutation date; the greater of either pension payments drawn in the year of commutation or the pro-rated minimum amount required to be drawn prior to the commutation taking place; and any other debits in relation to the pension, other than payment splits relating to a relationship breakdown.
“The debit value is not related to the commutation value at all — they are quite different. The commutation value of a market-linked pension is, of course, the account balance, and for a life expectancy pension, the commutation value is determined using a formula,” Ms Denham said.
She cautioned that while the new amendments would be helpful to some holders of market-linked pensions, it was a matter of advisers doing the sums to work out whether the debit owed to the pension holder would help them to stay under the transfer balance cap.
“For much larger pension balances, i.e. those that were large on 1 July 2017 or those that have grown since, the proposed debit value may not prove adequate to allow the pension to be commuted and restarted without adverse transfer balance cap consequences,” Ms Denham said.
