‘Extremely limited’ rollover options for defined benefit pensions

“Consequently, where an SMSF is to be wound up, a member that has one of these pensions must roll over to another complying pension,” Accurium stated.

Over the last few years, generally, there have been two options considered for the rollover of a complying defined benefit pension: to commute to a retail complying annuity or to commute to a market-linked pension.

“Where the complying defined benefit pension is a 100 per cent asset test exempt (ATE) pension for Centrelink purposes and retaining the ATE status is a key priority for the SMSF member, the trustee could roll out the assets supporting the complying defined benefit pension to purchase a complying annuity with a life office,” the actuarial firm explained.

“As the ATE is retained, this option minimises the impact on the member’s age pension entitlements.”

The actuarial firm explained that a complying annuity provides an income stream for the person’s lifetime or fixed-term and is held in the individual’s name outside the SMSF.

“To meet the requirements of being a complying pension, the annuity must be non-commutable. However, a benefit may be available on the death of the member [which is] generally equal to the present value of the remaining payments,” it said.

“However, our understanding is that there is no longer any institution or APRA-regulated fund with such a complying pension product still open.”

If this is the case, Accurium stated that a rollover of the SMSF member’s complying defined benefit pension would have to be to a market-linked pension, which will likely result in loss of ATE status and may affect their future Centrelink entitlements.

“This not only affects those who wish to make a choice to wind up their SMSF, but also those where they cannot obtain the relevant actuarial solvency certificate. Given the time of the year, SMSFs with 100 per cent ATE complying defined benefit pension members need to finalise financial statements for 2020-21, obtain the actuarial solvency certificate and provide to Centrelink,” said Accurium.

“Generally, to retain the 100 per cent ATE status of the complying defined benefit pension, the relevant actuarial solvency certificate is required to be completed each year by 29 December and submitted to Centrelink by 19 January.”

Accurium noted that where Centrelink concessions are not a concern for the SMSF member, to enable the wind up of the SMSF, they would have the option to roll over their complying defined benefit pension to an APRA-regulated fund to commence a new market-linked pension or to an institution to commence a retail TAP. 

“However, we are aware that a number providers of these pensions will only accept monies from a rollover of a complying pension where that pension did or would have qualified for the 50 per cent ATE status and not for the 100 per cent ATE status. This means that they will only accept the rollover of a complying pension that commenced on or after 20 September 2004 and no later than 19 September 2007,” it noted.

“Fortunately, for now there remains at least one provider of a TAP that does not have any restrictions, other than the requirements to comply with the relevant provisions of SIS. This is good news for those SMSF members who have a defined benefit lifetime complying pension and wish to wind up their SMSF. However, given our research has found several providers of a TAP ceased their product over the previous 12 to 18 months, these current TAP options may not be around for too long.”

Where there is no non-SMSF option for an SMSF member with a complying defined benefit pension who fails the Centrelink solvency requirement, Accurium said they would have no option but to restructure the pension to a market-linked pension within the SMSF.

“They will not retain any ATE status and they will not be able to wind up the SMSF,” the firm stated.

While the proposed two-year legacy pension exit measure appears to provide an option to allow a member with a complying defined benefit pension to wind up their SMSF, Accurium said this would depend upon the actual wording of the legislation, which is yet to be released.

“Further, how the measure will operate, together with any tax implications, may influence whether or not an individual takes up the measure,” it said.