Speaking to SMSF Adviser, SuperConcepts’ executive manager of SMSF technical and private wealth, Graeme Colley, said that SMSF professionals may need to closely monitor the timing during volatility in the market and issues arising for the client when considering the transfer balance cap.
“The main issue is to try and get the timing of the pension right to second-guess whether the market may go down or have cash reserves in the fund that will allow payment of the pension without being impacted by market volatility,” Mr Colley said.
“If the cash flow still has issues with the fund, you could commute the pension and commence a new pension. However, this can lead to transfer balance cap issues, as commutation of the pension is treated as a debit against the pensioner’s transfer balance cap.”
Mr Colley said, from a professional point of view, there will need to be strong considerations of the impacts in the deficits of members’ accounts and commutating the whole pension.
“Another thing with the transfer balance cap you need to be careful of is when there is a drop in balance and where there is commutation, the commuted value may be less than the transfer balance account. What that means is when they go to start a pension in the future, they might find they are not able to top up the original amount they started with the original some time ago,” he said.
“The drop in investment values will also impact the debit you get out of that and a slow cap space that might be seen with the drop in value.”
Mr Colley said this may reduce the amount of pension that can be commenced in the future, and he gave an example of Dave, who is aged 68 and commenced an account-based pension on 1 July 2018 with $1.2 million which was counted as a credit against his transfer balance cap.
“On 1 January 2021, the balance of the pension account had reduced to $900,000 which was due to pension withdrawal and a reduction in the value of the fund’s assets,” he explained.
“Dave decides to fully commute the account-based pension and transfer it back to accumulation phase, as he wishes to reduce the amount he withdraws from his super fund. He starts the new account-based pension with $900,000; however, it will have no impact on his transfer balance account balance.
“The only benefit of the commutation and recommencement of the account-based pension may be to reduce the amount Dave receives and it may have no impact on his transfer balance cap balance.
“The downside is that when the pension is commuted, Dave will be required to pay the pro rata minimum as the pension has been fully commuted. It may be better for Dave to delay commuting his account-based pension until the end of the financial year in the hope that markets improve.”
