Melanie Dunn, senior actuary at Accurium, said the latest Class Annual Benchmark Report revealed some interesting insights, including members utilising a strategy to maximise their transfer balance cap.
“Remember, when you make a pension payment, it counts towards your minimum pension payment requirements, but if you make a partial commutation and pay as a lump sum from your pension account, that doesn’t count towards your minimum pension payments, but it does create a debit in your transfer balance cap,” Dunn said.
“If you’re drawing more than the minimums, you can take those extra payments as a lump sum to create space in your transfer balance cap and open up the possibility in the future of being able to move more money into the retirement phase, or, for example, if your spouse passed away, and they’ve got a material balance, you’ll be able to receive that as a death benefit income stream.”
Dunn said the latest results show that only 1 per cent of members with a pension account, who met the pension standards, were utilising this strategy.
“That kind of blows my mind because that’s such a small proportion. Is it that it’s perceived as advice? Are we just not communicating this strategy well enough? Is it not relevant?” she said.
Kate Anderson, general manager, operations for Class, said this strategy is often perceived as more than it actually is.
“I think accountants may be nervous about using it as they perceive it’s advice. We’ve got to get better at helping our clients learn things about super. If you explain it to a client, they will dive into it themselves,” she said.
“They’ll be worried about cost, and I think they don’t think about the benefits, because they don’t want to take a long-term view necessarily. I don’t imagine this is something members think about – that when a spouse dies they’ll need a TBC then.”
Anderson said she believes advisers don’t like the idea of having to give that kind of advice.
“Which is a shame because it can be done pretty easily and it’s a very easy way to add value,” she said. “It’s just that the value is not immediately obvious and you have got to wait for something else to happen.”
Dunn said the research revealed that only 2 per cent of members were using the strategy, even in the case of high-net-worth clients.
Mel
This strategy also works if you have an accumulation account and a pension account and maybe do not really need the money outside – perhaps helping your kids with the inflation issues. You will be able to convert your accumulation account to pension phase.
An interesting scenario can be that pension account can continue to grow with unrealized gains – whilst you are withdrawing all the cash income as pension and part pension commutation. After a few years, this strategy can result in an unlimited TBC – pre 2017 era!
As an example – if a pensioner purchases a property with $1.9M with 10% return and growth of say 6% – Since the minimum pension withdrawal for this pensioner is 4% ($76,000) – the pensioner withdraws the full 10% ($190,000) with the remainder 6% ($114,000) as part commutation. Due to un-realized growth of the asset the pension balance on each 1st July will remain at $1.9M.
If a further $114,000 is moved from accumulation phase to pension phase – this would mean that transfer balance cap would be limit less – further it should be that if the monies are not commuted – pension balance will continue to grow and so would the minimum amount
We place these in the pension minutes saying unless otherwise advised then withdrawals above the min should treated as commutations.
The problem is getting the accountants to execute even if you inform them.
To be honest many of our funds need top ups to meet mins over needs. Is this why the % is so low Melanie or is it 1% of funds that exceed the min?