|Summary: Pension fund assets can be transferred back into accumulation phase, but the rules are changing later this year. There is no age limit that applies to your ability to do this.|
|Key take-out: With the current treatment of account-based pensions by Centrelink to change from December 31, 2014, you should seek advice as to whether or not you will be better off by commuting some of your pension account back into pension phase.|
|Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.|
Transferring pension assets back into accumulation
I recently saw a suggestion about transferring assets in one’s pension fund back into accumulation phase. The purpose was to reduce the pension assets, thereby reducing the amount one has to take out as a minimum, if one does not require all the income one is forced to take. If my wife and I have both a pension and accumulation fund currently, is there an age limit at which one cannot make this transfer? How does one make the transfer, say, of BHP shares from one fund to another? And are there costs or complications?
Answer: The great benefit of the new simpler superannuation system is that you can commute all or part of your pension at any time and transfer that value back into accumulation phase. There is no age limit that applies to your ability to do this.
If you have been using the segregation of assets method to calculate what assets and income produced relates to the pension account, you would need to change the allocation of those assets that will be commuted back into accumulation phase. This is done as an accounting entry and does not require any change to the ownership of the assets.
A more practical approach would be to commute a part of the pension and obtain an actuarial certificate, as this removes the necessity to transfer the investments.
With the current treatment of account-based pensions by Centrelink to change from December 31, 2014, so that deeming rates will apply to account-based pensions rather than allowing a purchase price deduction to reduce the amount that is assessed, you should seek advice as to whether or not you will be better off by commuting some of your pension account back into pension phase.
Understanding the assets test and pension payments
I am wondering if I withdraw the full value of my super fund, how does this affect my pension payment? I am a little confused between the different thresholds for the assets test for home owners and non-home owners. Why are there two thresholds, and which one applies to me?
Answer: As the value of a superannuation pension account is counted as an asset, withdrawing it does not have an effect on the assets test. There are two asset test thresholds used to assess whether an individual or a couple are eligible for the age pension. One asset test applies to homeowners and the other applies to non-homeowners. Because the value of a person’s home is not counted as an asset, the limit for non-home owners is higher.
If you are single and do not own a home the asset threshold, at which point your entitlement to a pension starts to decrease, is $339,250, and if you have a partner the combined total is $421,500. If you are single and own a home the assets test limit is $196,750, and if you have a partner the combined asset test limit is $279,000.
Reducing payments from market-linked pensions
I have a 20-year market-linked pension, which commenced in 2007 and enjoys a 50% assets test exemption from Centrelink. As this pension balance has increased significantly over the last year due to the rise in the sharemarket, I understand that under Centrelink’s income test an increasing percentage of the capital balance each financial year has to be drawn down so that at the end of the MLP term, in my case another 13 years, the capital balance is zero.
This means the closer it gets to the end of the term, considerably larger amounts have to be withdrawn when such large funds are not required. For example, in year 19 the factor is 1.90 and the final year is 1.0. Are there any circumstances whereby some of the capital can be commuted, thus reducing the balance for the income test?
Answer: As you indicated, market-linked pensions commenced prior to September 20, 2007 have the benefit of only 50% of their value being counted in the assets test. The downside of this is that the rules relating to your pension mean that it cannot effectively be commuted and the minimum pension payment calculations apply.
The limited circumstances in which an assets test exempt income stream can be commuted are when the commutation has occurred to:
- pay an amount for the superannuation contribution surcharge up to the maximum amount,
- pay a hardship amount,
- the extent necessary to give effect to the split of an income stream pursuant to divorce property settlement, or
- pay an excess contributions tax amount.
Where an assets test exempt income stream is commuted incorrectly the income stream will be assessed by Centrelink as if it should never have been treated as an exempt asset. In this case, this could result in a debt being raised for overpayment of the age pension.
Higher contribution rates from July 1
Can a person over 50 at July 1, 2014 contribute $35,000 as a concessional contribution and $150,000 as a non-concessional contribution each year, making their total contribution $185,000, and do this for several years without incurring the wrath of the ATO?
Answer: The increase in the maximum super contribution rate to $35,000, from the current maximum general contribution limit of $25,000, applied from July 1, 2013 to people aged 59 or older on that date. The increase to $35,000 will apply to anyone who is 49 or older at July 1, 2014.
This means that a person who is 49 or older on July 1, 2014 could contribute their maximum concessional contribution of $35,000 and also their maximum non-concessional contribution of $150,000 and not incur the wrath of the ATO. In fact, a person could make a non-concessional contribution, if they have not exceeded the non-concessional contribution limit in the previous three years, of up to $450,000 during the 2015 financial year.
Ceasing contributions at age 75
I understand you are not able to make personal contributions to superannuation after age 75 and the only contributions that can be made are compulsory employer superannuation guarantee contributions. Could you please tell me what the date is that contributions must cease? Is it exactly on the superannuant’s birthday or is it in the year in which they turn 75?
Answer: The cut-off date for a superannuation fund to receive a non-compulsory superannuation contribution on behalf of a member is up to 28 days after the end of the month in which the member turned 75.
Working after retirement
I’m 61 years of age and have been drawing a pension from my SMSF for six years. I’ve been asked to conduct some (paid) consultancy work, around 5-10 hours per week. Can I do this and invoice for my time without adversely affecting either my tax status or my SMSF tax status?
Answer: From what you have described it would appear that you met a retirement condition of release six years ago after turning 55 and have been receiving an account-based pension since then. As you are over 60, any lump sum payments or pension you receive from your super fund are tax-free. If you go back to work, either as a consultant or even a full-time employee, this will not affect the tax status of your current pension.
Under the retirement condition of release a person at the time of deciding to retire must have the intention of not working more than 10 hours per week. As long as a person actually retires it does not matter if their personal circumstances change at some time in the future and they resume working for more than 10 hours per week. The tax-free status of a superannuation pension account does not change if a member resumes work.
Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.
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