You are here:   HomeDocumentsSuper Fund - Income StreamsComplying | Market Linked Pension Reset
Print

Complying | Market Linked Pension Reset - from $440

ORDER NOW

PRODUCT INFORMATION

The ability to commence most types of complying pensions in an SMSF ceased on 31 December 2005. However, existing complying pensions could continue to be paid post this date. Complying pensions include lifetime complying and life expectancy pensions.

The ATO’s release of its SMSF Regulator’s Bulletin SMSFRB 2018/1, concerning the use of reserves by SMSFs, has prompted a call to action for members in receipt of a complying pension to consider the suitability of ‘resetting’ their pension.

The Topdocs technical team have prepared a detailed account of the reasons why a complying pension reset may be suitable for your clients which you can download below.

This article also considers the suitability of resetting an existing market linked pension to amend the term of the pension.

download Download Topdocs’ technical article – Complying Pensions in SMSFs – A call to action

Our complying | market linked pension reset documentation enables a member in receipt of a complying or market linked pension to commute that pension and commence a market linked pension with the assets funding the existing pension.

download Review the Complying | Market Linked Pension Reset order checklist download See the list of documents you will receive

YOUR PACKAGE INCLUDES:

  • Pension commutation member request, trustee confirmation and trustee minutes
  • New market linked pension application form
  • New market linked pension agreement
  • Comprehensive product disclosure statement (PDS) that complies with the Australian Securities and Investment Commission (ASIC) disclosure requirements
  • Trustee minutes
  • Full calculations
  • Pension summary sheet

WHY ORDER A TOPDOCS COMPLYING | MARKET LINKED PENSION RESET PACKAGE?

  • Our reset documentation can be used with any SMSF trust deed that provides for the commutation of the existing pension and the commencement of a market linked pension
  • You receive a fully tailored, comprehensive package that meets the ASIC, ATO and legislative requirements
  • Populate your online order with your Fund data directly out of BGL Simple Fund 360, Class Super or SuperMate

MORE INFORMATION

You can learn more about the Topdocs Complying | Market Linked Pension Reset documentation in the RELATED INFORMATION tab.

Should you have any queries or require more information, please call the team at Topdocs on 1300 659 242.

ORDERING OPTIONS

ORDER ONLINE

Order your document online in three easy steps:

  1. Login or Join the Topdocs Document Portal
  2. Select your document
  3. Follow the prompts and you're done!

LOGIN

If you haven't used the Topdocs Document Portal before, you can join by clicking on the JOIN FREE button and following the prompts.

ORDER BY FORM

Order your document by completing the form below and returning it to us by email or fax.

Should you have any queries or require more information, please call the team at Topdocs on 1300 659 242.

PRICING

ADVISER^
(inc GST)

RETAIL
(inc GST)

INSTANT EMAIL DELIVERY


  • due to the complex nature of this document, it is only available via full service delivery

Not Available


Not Available


FULL SERVICE DELIVERY


  • your documents are professionally printed and bound then delivered to you by Toll Courier delivery is generally within 48 hours

$440


$550


adviser pricing ^ Adviser pricing is available to accountants, financial planners, SMSF specialists and Lawyers. This pricing will be automatically applied to your document orders when you join Topdocs and sign into the Topdocs Document Portal.

YOUR DELIVERY OPTIONS

When you order a document you can select how you would like it delivered to you. Your options are:

FULL SERVICE DELIVERY

  • your documents are professionally printed and bound then delivered to you by Toll Courier.

Should you have any queries or require more information, please call the team at Topdocs on 1300 659 242.

RELATED INFORMATION

MORE INFORMATION

Outlined below is additional information relating to the document you have chosen.

Complying Pensions in SMSFs – Call to action

The ability to commence most types of Complying Pensions in an SMSF ceased on 31 December 2005. However, those Complying Pensions could continue to be paid. The fact some SMSFs are still paying Complying Pensions gives rise to possible need for considerations by Trustees.

The ATO’s release of its SMSF Regulator’s Bulletin SMSFRB 2018/1, concerning the use of reserves by SMSFs, provides a timely reminder of the need to consider taking action on Complying Pensions.

SMSFRB 2018/1

The SMSF Regulator’s Bulletin provides the ATO’s views on the use of reserves by SMSFs.

In short, the only form¹ of ‘reserve’ which the ATO considers to be acceptable is a reserve for complying pensions.

Types of Complying Pensions

The main Complying Pensions, and the SIS Reg under which they are paid, are:

Type Reg
Lifetime 1.06(2)
Life Expectancy 1.06(7)
Market Linked 1.06(8)

A Market Linked Pension is unlikely to have a reserve, as the pension range for a year is determined by the value of its underlying assets (account base) each year. As Lifetime and Life Expectancy Pensions need to meet solvency requirements, they hold reserves to meet those requirements.

Call to Action

Having determined that a Complying Pension reserve is not on the ATO banned list, we need to consider a much more pressing issue – what will happen to the assets supporting the pension on the death of the pensioner (or even earlier)?

It is Not Their Money!

When the Lifetime and Life Expectancy Pensions were commenced, the member effectively exchanged their balance (or part of it) in the Fund for the right to receive a pension, either for the term of their life expectancy or for the remainder of their life.

In other words, the funds supporting the pensions do not belong to the members and, on completion of the term of life expectancy or the death of the pensioner², will belong to the fund (and be held in a pension reserve).

The ATO, in SMSFRB 2018/1, confirms that position at paragraphs 24 & 25 by stating:

“Trustees should also be aware of … ATO ID 2015/22… The pension account and the pension reserve account are taken together to represent a ‘reserve’ for the purposes of regulation 291-25.01 of the ITAR 1997.

However, the amounts in these accounts comprise an amount available to the trustee, not the member, to satisfy the trustee’s liability to pay the complying lifetime pension.“

Therefore, to overcome the potential of the Trustee having to deal with a pension reserve after the pension has ceased, consideration may need to be given to commuting the pension during the lifetime of the pensioner.

As the Lifetime and Life Expectancy Pensions in SMSFs have been running for more than 12 years (i.e. commenced pre-December 2005) and, considering the member’s age when the pensions are likely to have commenced, that consideration may be an urgent matter.

What Happens to the Funds?

To answer that question, let’s consider Jenny who commenced a 15 year Life Expectancy pension in 2004.

Although Jenny’s life expectancy in 2004 was 15 years, she is fit and healthy and looking forward to many more years of life.

Jenny is also expecting to receive the remaining funds supporting her pension once the term expires in 2019.

Unfortunately, the remaining funds will not automatically be paid to Jenny as they are not hers. They belong to the Trustee and are to be held in a reserve in the Fund.

Sure, the Trustee could pay Jenny the remaining amount but it would represent an allocation from a reserve which would, potentially, result in Jenny being deemed to have exceeded the concessional contributions cap in the year of payment.

There is scope to allocate funds from a reserve, so all may not be lost for Jenny, but there are limits on the amount which may be allocated each year. The two main limitations are:

  • the amount allocated is distributed proportionately to all members at up to 5% of their interest in the fund (remembering the money in the reserve is not Jenny’s ‘interest’ in the Fund – she may not even have a balance); or
  • the amount allocated will be measured against the concessional contributions cap of the relevant member.

Jenny is not likely, because of her age, to have made concessional contributions in the year of payment, so she could receive allocations of $25,000 per annum until the reserve is exhausted.

How soon that occurs will of course depend on the total amount remaining but, unless the amount was minimal, it could take some years to extinguish the reserve, without incurring excess contributions tax³.

Available Options

Leaving action until the term expires (Life Expectancy) or the death of the pensioner may preclude any ability to restructure the pension.

With a few exceptions, complying pensions are generally non-commutable.

One of those exceptions is when the proceeds from the commutation⁴ are applied in the commencement of another complying pension.

If the pension is to be paid from the SMSF, the only form of complying pension able to be paid is a Market Linked Pension.

Market Linked Pension

A Market Linked Pension, although a complying pension, operates in similar fashion to an Account Based Pension, in that:

  • the annual pension amount is based on the value of the underlying assets at the start of the year; and
  • on death, the remaining balance in the pension account can form part of the member’s death benefits.

The latter point is a common reason why Trustees choose to commute complying Life Expectancy or Lifetime Pensions and use the funds from that commutation to commence a Market Linked Pension.

Transfer Balance Cap Issues

Defined Benefit Pensions received different treatment under the Superannuation Reform legislation which mainly took effect from 1 July 2017, when compared to Account Based Pensions.

As the funds supporting Life Expectancy, Lifetime and Market Linked Pensions could not be commuted to the Accumulation Account of the individual members, different treatment was required so as not to force the member to breach the Transfer Balance Cap.

For Life Expectancy, Lifetime and Market Linked Pensions held before 1 July 2017, they will be deemed not to have exceeded the Transfer Balance Cap but different taxation provisions apply to the pensions paid.

For Market Linked Pensions commenced on or after 1 July 2017, the standard Transfer Balance Cap rules apply, which effectively limits the ability to:

  • commute Life Expectancy and Lifetime pensions; and
  • commence a Market Linked Pension,

to those instances where the underlying capital would enable the total of the member’s Transfer Balance Account to remain within the Transfer Balance Cap.

Market Linked to Market Linked

Whilst we have focused so far on the commutation of Life Expectancy and Lifetime Pensions within the SMSF, so as to commence a Market Linked Pension, another aspect worthy of consideration is the commutation of an existing Market Linked Pension to commence a new Market Linked Pension.

As mentioned above, payments from Market Linked Pensions held before 1 July 2017 attract different tax treatment.

Additionally, a ‘special value’ is applied to determine the value of those pensions, and that value is then recorded in the member’s Transfer Balance Account.

That special value is arrived at by multiplying the pension payment by 16, as can be seen in the following example:

  • Ann has been receiving payments from a Market Linked Pension for some years;
  • the underlying value of the assets supporting the Market Linked Pension is $1,400,000;
  • her minimum pension for the 2017/18 year is $99,600 meaning she does not trigger the tax provisions which apply to pension amounts over $100,000;
  • the special value of her Market Linked Pension is therefore $1,593,600 ($99,600 x 16), slightly under her Transfer Balance Cap,

so there does not appear to be any reason for Ann to take any action regarding her Market Linked Pension.

However, Ann holds other funds, about $200,000, in her SMSF in Accumulation Phase, which she would like to move into an Account Based Pension.

If Ann:

  • commuted her Market Linked Pension; and
  • commenced a new Market Linked Pension,

the amount recorded in her Transfer Balance Account would be $1,400,000, the actual balance of the Market Linked Pension, leaving room for her to commence an Account Based Pension with the other $200,000, taking her Transfer Balance Account to $1,600,000.

Transfer Balance Account

Unfortunately, there is a Transfer Balance Account issue which needs to be overcome.

What appears to have been an unintended consequence of the drafting of the Superannuation Reform legislation is, according to the ATO, the fact that the commutation of the Complying Pension on or after 1 July 2017 will provide a zero debit to the Transfer Balance Account.

That will effectively result in double counting.

The pension will have provided a credit at 1 July 2017 and a further credit will be recorded for the commencement of the new Market Linked Pension – albeit using the same funds.

In recognising this, the ATO and Treasury are looking to rectify the anomaly. In the meantime, the ATO has released CRT Alert 066/2018, in which they advised they would not take compliance action in regards to either non-reporting or incorrect reporting of the Transfer Balance Account events.

What is needed to be done?

The trust deed must provide power for the Trustee to commute the Life Expectancy, Lifetime or Market Linked Pension, and authorise the commencement of a new Market Linked Pension.

Additionally, various documents, such as member requests, Trustee resolutions and agreements are required, which Topdocs can assist with.

Conclusion

If waiting for the term to expire, or the death of the pensioner, it will be too late to take action.

With Complying Pension recipients reaching quite senior ages, action should be taken sooner rather than later.

Similarly, with existing Market Linked Pensions, action may provide a better outcome for clients with pension balances under $1,600,000.

Consider it a Call to Action!

Notes

  • An unallocated contributions ‘reserve’ is also permitted, but the ATO considers that to be an ‘account’ rather than a reserve.
  • For simplicity, we are referring only to the pensioner, but, in reality, that term would include a reversionary pensioner.
  • Depending on Jenny’s personal assessable income, some excess concessional contributions tax may have limited impact.
  • Before commuting a complying pension, consideration should be given to the loss of any Asset Test Exemption entitlements under Centrelink and/or Department of Veterans Affairs rules.
download Download the Complying Pensions in SMSFs – Call to action article

Should you have any queries or require more information, please call the team at Topdocs on 1300 659 242.