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‘Continually in excess’ pensions linger for SMSFs

audit documents 382
Katarina Taurian
20 October 2017 — 2 minute read

Situations which can “easily arise” under current law with market-linked pensions are in need of government or regulatory attention to avoid tax consequences and non-compliance.

Market-linked pensions have been a sore point for the SMSF sector since the superannuation reforms were passed, and now AMP’s SMSF arm SuperConcepts is calling for further clarification and guidance about the way the transfer balance cap rules should be applied to market-linked pensions in certain circumstances.

For one, an area which may require a legislative amendment, is the issue of what happens if a market-linked pension is commenced on or after 1 July 2017, and the market value at commencement ends up exceeding the transfer balance cap.


“None of the pension received, by the member, is assessed against the defined benefit income cap and even though the pension exceeds the transfer balance cap, no portion of the pension can be commuted because it’s a non-commutable pension. So we are left with a pension that is continually in excess with essentially no mechanism under the current law to correct the situation,” SuperConcepts’ general manager for technical services and education, Peter Burgess, told SMSF Adviser at the SMSF Summit in Adelaide.

Further, Mr Burgess noted that unlike market-linked pensions which were commenced before 1 July 2017, those commenced on or after 1 July 2017 are not regarded as a capped defined benefit pensions.

This means any income received from the pension is not counted against the defined benefit income cap and their transfer balance account credit is based on the market value of the pension rather than the pension’s special value, he explained.

“So if a client stops and restarts their market linked pension post 30 June 2017, they may end up with a lower value counted against their transfer balance cap and none of the income counted against the defined benefit income cap. However, in order for this strategy to work, a transfer balance debit is required to offset the original transfer balance credit and there is uncertainty as to how this transfer balance debit should be calculated,” Mr Burgess said.

“For a capped defined income stream that is fully commuted, the transfer balance debit is equal to the pension’s special value just prior to the commutation. The special value is equal to the client’s annual entitlement multiplied by the remaining term. But if the client has already received their annual entitlement for the income year, then arguably the pension’s special value is zero because they no longer have a pension entitlement for the remainder of the income year.

“If this is the case, a client who stops and restarts their market-linked pension in this situation will not receive a transfer balance debit and will essentially end up with their market-linked pension being counted twice against their transfer balance cap.

"If this interpretation is correct, given a prorated minimum pension payment must be paid before the pension can be fully commuted, even if they haven’t received their full annual pension entitlement for the income year, they may still end up with a much smaller transfer balance debit than first thought.”

While at first glance it may seem like these issues affect only a small number of funds, it’s likely that a significant number of clients will find themselves in these circumstances, and there is currently not sufficient guidance available for professional advisers to ensure compliance.

“These situations can easily arise where, for example, a member effectively transfers their market-linked pension from one fund to another, for example where the SMSF is wound up and the market linked pension is transferred to an APRA fund, or a member wishes to restructure their lifetime complying pension to a market-linked pension for estate planning purposes,” Mr Burgess said.


‘Continually in excess’ pensions linger for SMSFs
audit documents 382
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