Speaking at a recent conference, Cooper Grace Ward partner Scott Hay-Bartlem said that for clients with transition to retirement income streams (TRISs), SMSF professionals need to be careful with the pension documentation and monitor for any potential transfer balance cap issues that may arise when the TRIS converts to an account-based pension.
Mr Hay-Bartlem explained that most pension documents for a TRIS are very similar to normal pension documents except with the two extra conditions. Those two extra conditions include the maximum 10 per cent drawdown and no lump-sum commutations.
While the condition preventing lump-sum commutations drops away once a full cashing restriction has been satisfied, a lot of pension documents doesn’t allow for this, he told delegates at the Cooper Grace Ward Annual Adviser Conference.
“Most retirement income stream documents that I’ve seen don’t automatically remove those conditions when someone satisfies a full cashing condition, so I’m seeing 67-year-olds who want to fully commute what used to be a TRIS and pull it out but they can’t because the transition to retirement income stream documents say you can’t commute,” he said.
“So you need to be very careful with these documents.”
Another catch for clients with TRISs, Mr Hay-Bartlem said, is that at some point in time, they will flip into a normal account-based pension, which may result in a transfer balance cap issue.
Any transfer balance cap issues will need to be managed when the income stream stops being a TRIS and becomes a normal account-based pension, he reminded SMSF professionals.
“[As] the trustee should know they’re turning 65, the flip happens automatically and the transfer balance credit happens automatically,” he said.
Given that TRISs don’t receive exempt current pension income and therefore don’t have a transfer balance account, a client could potentially start a TRIS with $10 million because there’s no transfer balance account issue.
“We have a client who has done that. He has a $10 million TRIS, and when he turns 65, which is a few years off, that’s going to convert into an account-based pension and we’re going to have a transfer balance account credit at that point in time,” he said.
“So, we need to be on the front foot and be aware that at least by then, we need to be fixing it up so we’re managing it, because you don’t want a $10 million credit in your transfer balance account.”
