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Self Managed Super Fund (SMSF) Article
Moving Allocated Pensions into Account-based Pensions

By Tony Negline.

This article may be out of date.

26th September 2007

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Any SMSF that was paying an allocated pension before July this year has a lot of decisions to make.

The first decision has to be to work out if the trustees want to use the new payment factors or the retain the old ones.  There appears to be a view that the new payment factors automatically apply to existing allocated pensions.  This is wrong.

If a SMSF trustee paying an existing allocated pension does nothing then the pension’s current set of payment factors will continue to apply.

There are actually two sets of old payments factors – which are called Pension Valuation Factors.  Both of these PVFs contain a minimum and maximum factor for all age groups and the actual income paid from the pension has to be between the two income amounts.

The first set of PVFs applied to allocated pensions that commenced before January 2006.  The second set of factors that applied to allocated pensions which commenced between 1 January 2006 and 30 June 2007.

A super fund could use this second set of PVFs for pensions that started before January ’06 but many didn’t bother as the original set provided enough flexibility.

The pre-January ’06 PVFs required a 60 year old to receive income between 6% and 11% of the pension’s account balance.  An 80 year old had to receive income between 11% and 100% of the account balance.

The post-December ’05 PVFs require an income between 5.2% and 9.2% of the account balance for a 60 year old.  An 80 year old has to receive income between 9.5% and 32%.

The Simpler Super factors, which are official called Percentage Factors, only prescribe a minimum income but no maximum income.  That is, it is possible to pay all of the account balance out as income.

If a pension is a Transition to Retirement pension then the maximum income that can be paid is 10% of the account balance however this rule is found in a different super rule and is technically not part of the Percentage Factors.

The new Percentage Factors demand a minimum income of 5% for a 60 year old and 7% for an 80 year old.

Because the new Percentage Factors do not have a maximum income and slightly lower minimums they are more flexible.

The differences do not appear to be that significant.  However over the long term – say 30 or more years – the differences can be quite large.  For example, assuming you have average investment performance, the original allocated pension minimum PVFs are designed to use all your money by about age 90.  The new Percentage Factors will pay you a lower minimum which will see your pension money last much longer.  This is an important point given that we are all living longer and healthier lives.  The only way to work out which factors are the best for you is to do some number crunching.  You will need to make assumptions about the income you need each year and the investment earnings on your pension assets.

If a SMSF wants to use the new Percentage Factors with an existing allocated pension they need to implement one of two options.  Firstly they can officially stop their allocated pension (the super industry calls this commutation) and then roll the money over to a new pension, called an Account Based Pension, and use the new Percentage Factors.

Secondly they could alter the rules of their existing allocated pension so that it becomes a pension within the new Account Based Pension rules.  How is this done?  You have to look at how the original pension was set up.  What official communication was there between the trustee and the member when the pension commenced?  Did that communication effectively create a contract?  Perhaps the pension was created via trustee minutes.

Whatever process was used the amending documentation will have to refer to the original material so it can be correctly amended.

Another common question is what do SMSFs now needs to do in relation to income tax collections from pension payments.  Under the old rules, SMSFs paying pensions had to set themselves up as PAYG payers, deducted income tax if necessary from each pension payment and each year issue a PAYG statement which the member attached to their individual tax return.  Also when the pension started the fund had to send the tax office an RBL Notification.  This notification was then used to work out how much tax the member had to pay on each pension payment.

If the member is over 60 all pension payments are tax-free and the ATO has said that the fund does not need to be a PAYG payer or issue and annual PAYG Statement.  Additionally when the pension starts an RBL Notification is no longer required.  This means the administration of the fund should be simpler so the cost of looking after the fund should be lower.

Another issue that needs to be considered are the age pension assessment rules.  Unfortunately the relevant government departments have decided to leave their assessment rules the same as they have been since September 1998.  That is, for allocated pensions the account balance will be fully counted for the assets test and the income less an offset will be counted for the incomes test.

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