A senior industry executive has confirmed the five-year amnesty allowing SMSF trustees to commute legacy pensions is also advantageous for recipients of commutable lifetime non-complying income streams even though all parts of the measure are not relevant to these structures.
Smarter SMSF education and technical manager Tim Miller acknowledged commutable lifetime non-complying income streams, also known as flexi-pensions, had been commutable before the amnesty came into play on 7 December last year, but had particular rules applicable to these actions.
“Flexi-pensions are not subject to the new commutation rules. They already had their own existing [conditions] that provide [for] a commutation value. However, the reserve allocation rules [contained in the five-year amnesty measure mean] we can commute [the entire value of a] flexi-pension in accordance to the regulations,” Miller told attendees of the most recent SuperGuardian technical webinar.
He demonstrated how flexi-pensions could be stopped before the five-year amnesty using an example of one of these income streams valued at $1 million with a yearly drawdown of $100,000.
“[To commute the income stream in this situation you would] have to apply a SIS (Superannuation Industry (Supervision)) [dictated] factor to determine what the commutable value of that pension is,” he explained.
“Let’s say based on the individual’s age that SIS factor is six.
“You then take the income, that $100,000, and multiply it by that SIS factor of six, [giving you] a commutable value of $600,000. So [the SMSF member could then] roll back $600,000 under the existing commutation rules, with the other $400,000 being forfeited to a reserve.”
He pointed out it is this reserve amount to which the five-year amnesty measure will apply, improving the outcome from stopping a flexi-pension.
To this end, he said the $400,000 amount in the example can be allocated to the pension recipient without any contributions cap implications.
Previously, this balance would have been allocated on a fair and reasonable basis to fund members for no more than 5 per cent of the total reserve amount, with any sum greater than this counting towards their concessional contributions cap.
