Call for market-linked pension fix

market-linked pension

The SMSF Association has asked the ATO to correct an anomaly in the transfer balance account debit calculation when a market-linked pension is commuted.

The SMSF Association has called on the ATO to exercise its regulation-making powers to correct an anomaly that has surfaced due to a technical change to commutations to an income stream from a market-linked pension which was passed as law during the June parliamentary sitting.

The amendment in question relates to the transfer balance account (TBA) debit calculation associated with the commutation of a market-linked pension leading to an adverse outcome for superannuants restarting that pension.

“We’re calling on the ATO to use [its] regulation-making powers to create a write-off, a transfer balance debit, and there are already write-off transfer balance account debits in the law. We’re asking for a new debit to apply here for clients who have, prior to this new formula coming into play, started their new market-linked income streams and have reported a [TBA] debit using a different formula,” SMSF Association deputy chief executive and policy and education director Peter Burgess revealed at the industry body’s Technical Day 2020 today.

“We’re asking for a write-off debit to apply so we don’t end up with excess balances here and also to avoid situations where we have a market-linked income stream that is continually in excess.

“This could arise where clients have based their [TBA debit] calculations on the old formula. Now they’re having to re-report [and] they’re reporting a lower figure, so what that means is they could end up with an excess pension balance that could continue in excess because market-linked income streams are, of course, non-commutable.”

Specifically, the problem has arisen because the TBA debit on a commuted market-linked pension had previously been calculated using a formula consisting of the annual entitlement multiplied by the remaining term.

The new legislation dictates the calculation formula to be used now is the original TBA debit reduced by the value of previous pensions received or entitled to be received at the date of commutation.

According to Burgess, the revised calculation gives rise to a much lower TBA debit, which can result in a disadvantageous mismatch if the same market-linked pension is recommenced.

“It will give rise to, we think, a lot of individuals having an excess pension balance and notional earnings being calculated [that will be] backdated right back to 1 July 2017,” he said.

“We don’t think that’s the right approach for clients who acted in good faith when they commuted and restarted these pensions using the information they had available at the time.”

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