A Christmas present for old SMSF pensioners

There were fears during the consultation period that these regulations would be linked to Division 296 measures – as part of the SMSF Association working group that consulted with the Treasury, I urged them to separate the two points for a number of reasons, which in the latter were included in the final regulations issued. Although not all of our wishes have been met, these Regulations provide some quite significant opportunities for SMSFs with pensions and legacy reserves.

While we discussed these measures in a previous bloga brief description of what they provide, including additional clarity that was provided in the final explanatory statement.

Commute to non-switchable

The switching provisions SIS 1.06(2) – Lifetime Compliance, SIS 1.06(7) – Life Expectancy (Fixed Term) and SIS 1.06(8) – Market Linked Pensions have been incorporated into the SIS Regulations. It should be noted that these pensions the commute must be done full. The resulting capital, including any reserve supporting the pension, can be:

• used to purchase an account-based pension, subject to the transfer balance cap,
• retained in accumulation or
• removed from the pension system.

The allocation from the reserve will not take into account any contribution caps. We will consider the ramifications of the transfer balance cap in a separate blog.

Allocations from reserves

The new regulations effectively replace existing income tax regulations which provide for circumstances in which allocations from reserves are either excluded from the concessional contribution cap or taken into account.

However, they take it a step further as a result of the new switching provisions, with an added bonus.

Any reserve which has been established solely for the purpose of supporting an inherited pension, certain pensions granted before 1 January 2006, may be allocated to the pensioner, regardless of whether that pension is commuted as a result of these regulations or has ceased before their introduction, as is the case of most life expectancy pensions. The catch being the original pensioner must be alive, noting that there are other provisions for reversionary pensions.

The additional bonus – flexible pensions

Although it was not made clear when the draft regulations were published, these reserve regulations, and in particular the exception to allocation taking into account any cap, are extended to SIS 1.06(6) flexible pensions. Flexi pensions already have a mechanism to allow them to be switched, albeit with often disappointing results, but with the new regulations this switch can now be completed with a full allocation from the remaining reserve, music to the ears of many remaining flexi pension holders.

Non-concessional ceiling allowances

The most significant change to those allowances that are otherwise measured against the contribution cap is that they will now be measured against an individual’s non-concessional contribution cap (NCC) rather than against the concessional contribution cap (CC) . Conveniently, if any allocation was made before the introduction of the Regulations, it will be taken into account for the concessional ceiling, ie in the current year, there is a possibility that different allocations will be taken into account for different ceilings.

The improvement not only provides for the allocation of higher amounts, but also provides for the mechanism for those without an NCC cap to eliminate the excess and 85% of associated earnings that may result in a lower personal tax result.

In summary and next steps

All in all, these measures are a welcome addition to our regulations and, while we were hoping for some further improvements, they are better than what we had before they were introduced. Of course, there are still plenty of things to consider, especially for those Social Security clients using them for asset-tested exemption purposes.