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Self Managed Super Fund (SMSF) Article
Steps to rolling over a pension to another pension
By Tony Negline.
This article may be out of date.
21st April 2010
This week we continue our series of articles about certain types pension transactions. Thus far we've looked at cashing a lump sum of money out of a pension and "rolling back" a pension. This week we're going to look at rolling over some or all of a pension's account balance to another super fund.
The purpose of this transaction is to change pension providers, merge two or more pensions or to alter the features of a pension.
Most pensions commenced in the last ten years can be rolled over to a new super fund including Transition to Retirement pensions. In some rare cases the rules of a pension do not allow it to be stopped for any reason so before embarking on this transaction please carefully check your pension documentation including your super fund's trust deed.
Rolling over some part of a pension's account balance to another super fund will effect future pension income payments. Obviously if all of a pension's account balance is rolled over then all future income payments from the original pension will cease.
Before a pension's account balance is rolled over to a new super fund, the originating super fund's trustee must make sure that the pro-rata minimum pension has been paid. The lump sum rolled over to the new super fund cannot be used to satisfy this minimum income payment rule.
Once the lump sum has been transferred, some people recalculate the annual required minimum pension payment. Ordinarily this minimum pension amount is worked out each 1 July. The super laws however don't allow the minimum pension to be recalculated. To be explicit, the minimum pension payment is not recalculated after the lump sum has been rolled over.
The amount rolled over will not be a contribution for super law purposes. This means that the super law contribution rules (especially relevant for those aged at least 65 do not need to be satisfied). The lump sum's preservation status however will remain unchanged. This means any Preserved Benefit used to pay a Transition to Retirement pension will remain a Preserved Benefit.
Some super commentators argue that before a pension's account balance is rolled over to a new super fund, it's account balance is technically moved from the 0% pension phase and into the 15% accumulation phase. This means that if the existing super fund has to sell any assets before paying the new super fund the rolled over account balance, Capital Gains Tax might be payable on any gains.
Super fund trustees should proceed carefully on this point and should consider getting a tax office Private Binding Ruling to ensure that there are no nasty surprises. If CGT is payable then the super fund should deduct this from the lump sum before it is rolled over.
The originating super fund must tell the new super fund the Taxable and Tax-free Components. Any untaxed element in the rolled over value will be taxed in the receiving super fund. These untaxed elements typically arise from public sector and government employee pension schemes.
From the financial services law point of view the roll over transaction is deemed to be similar to the purchase of a financial product. This means that if a licensed financial adviser has recommended the transaction then they should issue a Statement of Advice and detail why rolling over is an appropriate course of action as well as all the costs involved.
Depending upon the relationships involved some financial advisers might be able to rely on replacement product advice rules. Typically these rules reduce the amount of material that has to be disclosed again to an investor.
In most cases, rolling over a pension to another super fund will involve the new super fund issuing a financial product. This means that the new super fund will need to receive an eligible application form from the new member and must also issue a Product Disclosure Statement.
A nine step process is used to implement this transaction in the originating super fund:
- Member requests rollover or notifies that they have the right under the terms of their superannuation pension
- The trustee confirms entitlement to rollover the pension
- The trustee issues a Pre-payment Statement – a specific ATO issued document
- The pre-payment statement is completed and signed by the super fund member and returned to the trustee
- If required the trustee works out what the pro-rata minimum pension payment should be just before the lump sum is paid
- The trustee sells/transfers assets to make the lump sum payment
- The trustee adjusts the original pension's account balance
- If required the trustee issues relevant exit information to the member
- For Self Managed Super Funds, if the member has left then this will trigger a change in trustees. In most cases the member must resign as a trustee and the ATO must be notified of this change in trustees. For individual trustees this would trigger changes in asset ownership.
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.