Expert sheds light on complexities with indexation and reversionary pensions

Ms Dunn gave an example of Mary who turned 65 on January 2023. She decides not to commence a retirement phase pension prior to 1 July 2023.

Her spouse, George, had previously commenced an account based pension for $1.6 million in May 2021. The pension was set up as reversionary to Mary so it will automatically revert to her when George passes away.

“Unfortunately, George died this income year on 29 July 2022. At the time, the value of his account based pension was $1.68 million,” she explained.

In this scenario, Ms Dunn explained that Mary will still be entitled to the full indexation of her person transfer balance cap on 1 July when the general transfer balance is expected to increase.

“When George died, his account based pension reverted to Mary prior to 1 July 2023 and the SMSF would have recorded the transfer balance account event at the start of that new retirement phase reversionary income stream no later than 28 April 2023.”

“Although it’s all reported and she’s got the pension, remember that as a reversionary income stream, the transfer balance account credit from that doesn’t arrive in Mary’s transfer balance account until the 12 month anniversary date.”

Ms Dunn said this means that on 1 July 2023, Mary still doesn’t have a transfer balance account and so she would still be entitled to the full indexation of her personal transfer balance.

“[However], if George had died prior to 1 July 2022, then that credit would have hit prior to 1 July 2023 and she would have only been entitled to partial indexation of her personal transfer balance cap.”

Ms Dunn said it’s likely that the general transfer balance cap will increase either to $1.8 million or potentially to even $1.9 million which will depend on the CPI figure for the December quarter is, which is due to be released next week.

“If that CPI figure hits at around 130.7, then the general transfer balance cap value will index by $200,000 up to $1.9 million. It needs to be around 123.8 for the cap to increase to $1.8 million.”

Depending on what the CPI figure is, Ms Dunn said there could potentially be members with personal transfer balance caps ranging from $1.6 million to $1.9 million from 1 July 2023.

“That ATO will be doing this calculation. At [sic] 1 July 2023, they will reassess everyone’s personal transfer balance cap, so it’s very important to submit any outstanding TBARs that you have prior to 30 June 2023 to ensure that assessment is correct,” Ms Dunn continued.