Crissy Demanuele explores the impacts of proposed changes to Centrelink/DVA rules that allow the commutation of a complying pension in an SMSF to start a new pension.

When setting up income streams for clients today you can generally ignore the concept of “complying pensions”, as this relates to concessions available under previous legislation. But you can’t so easily ignore the issues for the many retirees who may already have one in place.

As time progresses, needs may change, new opportunities emerge and markets can take their toll on asset values – and you may come across clients with a complying income stream who want to make changes.

BACKGROUND

A complying pension (or annuity) is a non-commutable income stream commenced with superannuation money which, at the time, met specific requirements to access Centrelink and reasonable benefit limit (RBL) concessions. This includes non-commutable lifetime, fixed term and term allocated pensions (TAPs).

Once started, a complying pension is non-commutable, except:

• within the first six months*; • to rollover to an other complying income stream (subject to policy restrictions); • under a divorce payment split; or • to give effect to a release authority (for example, surcharge payment). (* If the income stream was started with a commutation and rollover from another complying income stream, this six-month period does not apply.)

A complying pension commenced before September 20, 2004 receives a full Centrelink/Veterans’ Affairs (DVA) assets test exemption. If commenced between September 20, 2004 and September 19, 2007 (inclusive) only 50 per cent of the asset value is exempt.

COMPLYING PENSION IN SMSF

Circumstances may have changed since purchasing the original income stream and clients with a self-managed super fund (SMSF) or small APRA fund (SAF) may no longer need the assets test exemption; or the assets supporting a lifetime pension may have fallen to a level that can no longer support the income guarantees; or they may no longer wish to operate a defined benefit pension.

So what happens when a client with an SMSF/SAF wants to commute their complying pension?

The legislative rules for a complying pension do not allow lump sum withdrawals. If a lump sum payment is made:

• the pension may no longer meet the definition of an income stream for taxation purposes and any earnings (including capital gains) within the pension would become taxable income to the super fund; • the super fund may be deemed to be non-complying for allowing a member to illegally access money; • the super fund trustee could be penalised; • the pension would no longer receive an assets test exemption under the Centrelink/DVA rules and benefits paid in previous years may be clawed back. Under current rules, non-allowable commutations trigger a Centrelink/DVA reassessment that assumes the assets test exemption never applied. This may raise a debt through an effective clawback of Centrelink benefits paid in previous years due to the exemption.

NEW RULES ALLOW CHOICES

Social security/DVA rules may allow a complying pension to be commuted and rolled over to an equivalent complying income stream, within specific limitations, as outlined in section 4.9.2.17 of the Guide to Social Security Law at www.fahcsia.gov.au. But this does not allow the commutation of a lifetime or term certain pension to start a TAP.

However, the Minister for the Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA) has signed a legislative instrument to change the rules and allow a waiver of debt when a complying lifetime or term certain pension is commuted.

Warning: the legislative instrument to implement this new rule is expected to become effective from the end of August. Details should be checked with Centrelink before implementing for any client. Clients also need to ensure they do not breach any SIS requirements.

This provides the following options for clients with complying pensions in an SMSF or SAF.

* Assets-test-exempt (ATE) status can be retained only if the commutation occurs due to divorce or death of a reversionary who had a longer life expectancy at commencement, or the circumstances meet the requirements of section 4.9.2.17 of the Guide to Social Security Law.

Lump sum withdrawals are still not allowed. The proposed new rules may benefit a client who:

• No longer wants the burden of administering a defined benefit pension in an SMSF or SAF. • Has a lifetime pension inside an SMSF that no longer meets the ongoing actuarial requirements due to falls in market performance. • Wants to change income levels by starting a new TAP with a different term. It is important to look at the circumstances of each case individually. A focus on Centrelink and how changes affect the age pension might be important for some clients, but you also need to ensure you do not breach the SIS rules if clients want to rollover complying pensions.

Crissy Demanuele is the technical manager for Strategy Steps – www.strategysteps.com.au

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