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Corona shock may solve legacy pension issue

Coronavirus legacy pension

The coronavirus lead market downturn could help resolve the transfer balance cap problem faced by SMSFs looking to restructure an old legacy pension.

The impact of coronavirus on financial markets could help SMSFs resolve potential transfer balance cap (TBC) issues with a legacy pension, an SMSF technical expert has said.

SuperConcepts SMSF technical services executive manager Mark Ellem said the recent drop in market values as a result of the coronavirus pandemic may have created an ideal situation for SMSFs looking to restructure their old legacy pensions.

“With the significant drop in market values across asset classes, particularly shares and property, the numbers may simply work with a restructure of an old lifetime complying pension to a market-linked pension,” Ellem said in a blog post on the SuperConcepts website.

“For a lifetime complying pension, where it is the only retirement-phase pension that the member has, the full commutation of the pension will result in the member’s TBA (transfer balance account) being reduced back to zero.

“Provided the capital that was backing that lifetime complying pension is no more than $1.6 million, which it may be now, (unfortunately) due to the drop in asset values, the unresolved TBC issue for post-30 June 2017 market-linked pensions will not arise.”

He noted this could also apply to the restructure of a pre-1 July 2017 market-linked pension to a post-30 June 2017 market-linked pension.

While the drop in market values might resolve the TBC issue for SMSFs, those considering a potential pension restructure at this time should proceed with caution, he added.

“We are still awaiting the passage of the revised special debit rule, so take care with any potential pension restructure,” he said.

Last week, he said SMSFs with legacy defined benefit pensions should be given an amnesty to move to account-based pensions to prevent solvency issues related to investment market downturns, which may inadvertently penalise the pension recipients.

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