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Self Managed Super Fund (SMSF) Article
Steps to refreshing a pension
By Tony Negline.
This article may be out of date.
5th May 2010
This week we continue our series of articles about certain types of pension transactions. Thus far we've looked at cashing a lump sum of money out of a pension, "rolling back" a pension and rolling over a pension. This week we're going to look at "refreshing" a pension.
Refreshing means rolling back one or more pensions and then commencing a new pension. Before the new pension starts the old pension money might also be merged with non-pension or accumulation assets in the super fund for the same member.
There are three reasons to contemplate these transactions – injecting new capital into a pension, reducing the tax applying to the accumulation assets and avoiding the additional costs of running two or more pensions.
Most pensions commenced in the last ten years can be refreshed 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 refreshing a pension please carefully check your pension documentation including your super fund's trust deed.
Refreshing some part or all of a pension's account balance will effect future pension income payments. Obviously if a pension's whole account balance is refreshed then all future income payments from the original pension will cease.
Before a pension's account balance is refreshed, the super fund's trustee must make sure that the pro-rata minimum pension has been paid. The account balance transferred to the accumulation phase cannot be used to satisfy this minimum income payment rule.
The amount transferred back to the accumulation phase 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. Its preservation status however will remain unchanged. This means any Preserved Benefit used to pay a Transition to Retirement pension will remain a Preserved Benefit.
If the accumulation amount being added to the pension will include a personal contribution that the member intends to claim as a tax deduction then the trustee must make sure that it has a Sec 290-170 Notice from the member and the trustee must have acknowledged this notice in writing. If this paper-work is not enacted before the new pension commences then the personal contributions cannot be claimed as a tax deduction.
Super fund trustees should prepare for the cash flow impact of the payment of contributions tax especially if excess contributions tax will be paid. Similarly a trustee should prepare for the cash flow impact of any excess non-concessional contributions tax.
In some cases trustees will not want to include these contribution tax payments in the account balance of the new pension because when the bill for the payment of the taxes arrives part of the pension will have to be cashed out but there will be no corresponding adjustment to the required minimum income payment.
It's important to understand how the Tax-free Component of the new pension will be calculated.
If the member doesn't have an accumulation interest in the super fund then it would appear that the Tax-free Component of the new pension will be the original Tax-free Component of each rolled back pension.
If the member does have an accumulation interest in the super fund then the rolled back pension account balance and the accumulation interest will form a single accumulation interest in the fund. The tax-free percentage of each income payment will therefore be based on the Tax-free Component of this single accumulation interest.
If a trustee has segregated pension and non-pension assets in the super fund's financial accounts they will need to make sure that appropriate assets have moved between the pension and non-pension segregations. This process can be quite messy especially when dealing with a large number of assets.
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.
The new pension will involve the super fund issuing a financial product. This means that the super fund will need to receive an eligible application form from the new member and in most cases must also issue a Product Disclosure Statement.
A nine step process is used to implement merging pension assets:
- Member requests merging of accumulation and pension assets
- The trustee confirms entitlement to commute existing pension and commence the merged pension
- If required the trustee works out what the pro-rata minimum pension payment should be just before the original pension is commuted
- If necessary trustee and member exchange Section 290-170 Notice and acknowledgement paper-work
- The trustee commences new pension
- The trustee determines new pension's Tax-free Component and pension limits
- The trustee issues pension documentation
- If required the trustee re-segregates pension assets
- The trustee closes out the existing pension account, opens new pension account and adjusts the member's accumulation interest
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.