Commuting Defined Benefit Pensions in an SMSF The information in this presentation has been prepared by Accurium Pty Limited ABN 13 009 492 219 (Accurium). It is general information only and is not intended to be financial product advice or legal advice and should not be relied upon as such. It is a guide only and based on Accurium’s understanding of the 2016-17 Federal Budget Report and current taxation laws and the continuance of those laws and their interpretation. In preparing this information, Accurium has relied on publicly available information and sources believed to be reliable. However, the information has not been independently verified. Whilst all care is taken in the preparation of this presentation, no warranty is given with respect to the information provided. Neither Accurium nor their related entities, nor any of their directors, employees or agents accept any liability for any loss or damage arising out of the use of all or part or, or any omission, inadequacy or inaccuracy in, the information presented. Scenarios, examples and comparisons are shown for illustrative purposes only and should not be relied on by individuals when they make investment decisions. We recommend that individuals seek professional advice before making any financial decisions. Date 11/05/2017. www.accurium.com.au www.challenger.com.au
Agenda • Introduction to defined benefit pensions (DBPs) • Centrelink and regulatory requirements • Impact of the Transfer Balance Cap • Retaining the Asset Test Exemption • Options available to trustees when commuting an existing DBP 2
General features of complying DBPs • Member exchanged a purchase price for a series of regular payments - Pension payments pre-defined and must be paid every year - Income stream is not linked to investment performance - The assets supporting the pension do not belong to the member – belongs to the - Fund and controlled by the Trustees • Unable to start a new DBP in an SMSF since 1 January 2006 - Assets supporting the pension may be exempt from Centrelink Assets Test - 100% exempt if started on or before 19 September 2004 - 50% exempt if started 20 September 2004 to 31 December 2005 - Subject to an annual solvency test requiring an actuarial certificate 3
Types of complying DBPs Complying lifetime pensions • The pension payments continue until both primary and reversionary beneficiary pass away • SIS Regs - Section 1.06(2) outlines the governing rules of the pension • Cannot pay a superannuation death benefit • The pension can be commuted to start another complying pension: - Market linked pension (TAP) - Retail complying annuity • Special value under Transfer Balance Cap - Special value = Annual entitlement * 16 - If special value exceeds $1.6m then excess cannot be commuted to accumulation - 50% of excess pension income over the defined benefit income cap ($100k) included in individual’s taxable income 4
Types of complying DBPs Complying life-expectancy pensions • The pension payments continue until the end of fixed term • SIS Regs - Section 1.06(7) outlines the governing rules of the pension • Cannot pay a death benefit – can pay the remaining payments as a lump sum • The pension can be commuted to start another complying pension - Market linked pension (TAP) - Retail complying annuity - The commuted amount cannot exceed the benefit that was payable immediately before commutation • Special value under Transfer Balance Cap - Special value = Annual entitlement * remaining term (rounded up) - If special value exceeds $1.6m then excess cannot be commuted to accumulation - 50% of excess pension income over the defined benefit income cap ($100k) included in individual’s taxable income 5
Commuting complying DBPs Regulatory requirements • Lifetime pensions - Can use all the assets supporting a complying lifetime pension (including reserves) to commence a new complying income stream - ATO ID 2015/22 • Life-expectancy pensions - SIS Regs – section 1.08 restricts the amount that can be commuted to a lump sum - Refer to Schedule 1B in the SIS Regs to determine the valuation factor - Maximum amount = Pension payment * valuation factor from Schedule 1B - Commutation value is the amount of assets supporting the pension (including reserves) or the Maximum amount whichever is lower 6
Commuting complying DBPs Regulatory requirements • If all the assets supporting the pension (including reserves) are not used to commence a new complying income stream: - Surplus assets will remain in unallocated reserve - Trustees can allocate this reserve to members of the Fund - Two options available to the Trustees according to ITAR 1997 – Subregulation 291- 25.01 (4): • Option 1: 5% distribution rule - Allocated in a fair and reasonable manner to an account for every member in the - Fund; and - Less than 5% of the value of the member interest at the time of allocation. • Option 2: Use concessional contribution caps - The amount allocated will count towards the member’s concessional contribution cap - Amount allocated multiplied by 1.176 before applying against the cap 7
Commuting complying DBPs Social Security requirements • If the pension is Asset Test Exempt: - Assets supporting the pension need to exceed the high probability (>70%) valuation, as calculated by an actuary each year - Actuarial certificate needs to be signed before 29 Dec each year - Actuarial certificate needs to be submitted to Centrelink before 19 Jan each year - When commuting the pension to start a new income stream: - All the assets supporting the complying pension (including reserves) need to be commuted to a new complying income stream - If not Centrelink may not apply the waiver of debt provision 8
Commuting complying DBPs Transfer Balance Cap • Lifetime pensions - The debit value on commutation = credit value at 1 July 2017 – any debits from 1 July 2017 to commutation date (except for payment split) - Credit value is the value of the assets supporting the new complying income stream - Defined benefit income cap does not apply to the new income stream • Life-expectancy pensions - The debit value on commutation = special value recalculated as at commutation date - Credit value is the value of the assets supporting the new complying income stream - Defined benefit income cap does not apply to the new income stream 9
Commuting complying DBPs Retaining Asset Test Exemption • In order to retain the Asset Test Exemption (ATE) need to satisfy two conditions: • Primary conditions of relief - The original pension must be 100% ATE or 50% ATE; and - The original pension must be commuted in full to purchase a new income stream • Additional condition of relief - Need to satisfy ‘one’ additional condition of relief - Most common additional relief conditions are: -The pension does not satisfy the high probability requirement - The SMSF is being wound up because the trustees are no longer capable of running the SMSF • If the pension fails to meet the high probability test and the member wish to retain the Asset Test Exemption - ‘Restructure period’ of up to 12 weeks from the date Centrelink is notified to commence a new complying income stream 10
Commuting complying DBPs Option1 – Market linked pensions (TAPs) • Market linked pensions (MLPs) are a type of term pension - Minimum term is the member’s life expectancy - Maximum term is the number of years until the member turns 100 • The pension payments are based on Schedule 6 in the SIS Regs - Also has to meet the minimum pension standards • On death of pensioner a death benefit can be payable - Be vary if using reversionary beneficiary’s life expectancy • The MLP may retain the ATE if satisfies both primary and additional conditions of relief - Original pension commenced between 20 Sep 2004 and 31 Dec 2005 - Meet one additional condition of relief 11
Commuting complying DBPs Option 2 – Retail complying annuity • Type of product (term, RCV = 0) • How to determine the term of product • What happens of death? How the withdrawal value is calculated. • What situations when the ATE is retained • Can you commute a 50% ATE pension into a Challenger annuity 12
Commuting complying DBPs Case study 1 – Lifetime pension • John is receiving a complying lifetime pension commenced on 1 July 2004. The assets supporting John’s complying pension (including reserves) are valued at $360,000 and it is 100% ATE. John receives a $20,000 pension payment from his complying pension that increases with CPI. John also has an ABP worth $120,000. John’s wife, Marg, holds an ABP in the SMSF worth $150,000. John and Marg are both 70 years old and live in their own home. They have $200,000 in financial assets outside SMSF and their personal assets are estimated to be $50,000. Their required annual spending level is $65,000. John’s complying pension has failed the high probability test and he wishes to commute his complying pension into a new income stream. 13
Commuting complying DBPs Case study 1 • Three options available to the client: - Commute the complying lifetime pension to a retail complying annuity - Commute the complying lifetime pension to a MLP - Continue with the complying lifetime pension 14
Commuting complying DBPs Case study 1 – Commute to annuity • Estimated wealth at age 90 - $328,000 • Total Age Pension benefits over 20 years - $593,000 15
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