In the second in a series of articles, Tony Negline examines rolling over and refreshing pensions.
Pensions, and the various different transactions which can occur with them, always present problems for superannuation fund administrators. This is particularly the case with self-managed super funds.
(In drafting this article I have relied on a paper written by my colleague, Michael Hallinan, senior counsel at Townsends Business and Corporate Lawyers.)
Before we delve into the specific issues that apply to these transactions, there are a couple of points common to both rolling over a pension and refreshing a pension.
Rolling over or refreshing some part of a pension’s account balance to another super fund will affect future pension income payments. Obviously if all of a pension’s account balance is rolled over or refreshed then all future income payments from the original pension will cease.
‘It’s important to understand how the tax-free component of the new pension will be calculated’
Before a pension’s account balance can be rolled over or refreshed, the super fund’s trustee must make sure that the pro-rata minimum pension has been paid. The account balance transferred cannot be used to satisfy this minimum income payment rule.
From the financial services law point of view, the amount rolled over is deemed to be similar to the purchase of a financial product. This means that if a licensed financial adviser has recommended the rolling over or refreshing of the pension, then they should issue a Statement of Advice and detail why rolling over or refreshing a pension is an appropriate course of action, as well as all the costs involved in the transaction.
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.
ROLLING OVER PENSIONS
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 past ten years can be rolled over to a new super fund, including Transition to Retirement (TtR) pensions. It’s important to make sure the rules of a super fund and the pension itself allow it to be stopped.
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 July 1. The super laws, however, don’t allow the minimum pension to be recalculated.
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 TtR 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, its account balance is technically moved from the 0 per cent pension phase and into the 15 per cent 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 (CGT) might be payable on any gains.
Super fund trustees should proceed carefully on this point and might want to 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.
