MYEFO offers legacy pension fix

legacy pension solution

A solution to prevent transfer balance cap breaches when a legacy pension is commuted to market-linked pension has been proposed by the government.

The federal government’s Mid-Year Economic and Fiscal Outlook (MYEFO) has addressed some concerns around legacy pensions and included a solution for situations where a new market-linked pension gives rise to a transfer balance cap breach for the income stream recipient.

According to actuarial firm Accurium, the problem has arisen from circumstances where a new market-linked pension has been commenced after the full commutation of a lifetime complying pension, a life expectancy pension or a pre-1 July 2017 market-linked pension.

The firm added, to this end, the current rules dictate the new market-linked pension must be commenced at the current value of the income stream’s supporting assets and should this value exceed the recipient’s transfer balance cap, the excess will exist in perpetuity as a market-linked pension is not commutable.

However, the MYEFO announcement in December included a change in the government’s position regarding the subject, with Canberra stating: “The government is amending the law to ensure that retirees who have commuted and restarted certain market-linked pension, life expectancy pension and similar products are treated appropriately under the transfer balance cap.

“The measure will enable retirees with these products who have been unable to commute amounts in excess of their transfer balance cap to undertake the necessary partial commutation. The measure also ensures appropriate tax outcomes for these retirees given their prior inability to comply with the transfer balance cap rules.”

The change will come into effect when the proposed amendment to the legislation is granted royal assent.

In effect, the update to the law will mean if a new market-linked pension is commenced with a value in excess of the recipient’s transfer balance cap, the individual can perform a partial commutation of the pension that will allow the excess to be eliminated, Accurium said.

For example, if a new market-linked pension was commenced with a value of $2.3 million, the superannuant, under the new rules, could commute $700,000 of the income stream to ensure their transfer balance cap is no longer above $1.6 million.

While it welcomed the proposal, Accurium acknowledged there remain three unanswered questions to the proposed legislative change, the first being whether the partial commutation will have to exit the superannuation system completely, similar to the treatment of death benefit pension commutations.

The second question the actuarial firm identified is whether the Centrelink consequences have been considered if the pension restructure involves an asset test exempt pension or if the situation involves a pre-1 January 2015 grandfathered pension.

Thirdly, Accurium wondered if the proposed measure will only apply to circumstances where the transfer balance cap breach is caused by a post-30 June 2017 market-linked pension.

“If this is the case, it raises the question of the fairness of the proposal [as] those with pension capital greater than $1.6 million appear to be able to convert the excess amount to a lump sum, with full access [while] those with these types of pensions who are under their transfer balance cap have no opportunity [for this type of] access,” it noted.

Last year industry stakeholders called on the government to have this situation rectified.


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