Pension commutation TBA impact overlooked

Pension commutation

Advisers may not be recognising the advantages of using a partial commutation for drawdowns above the minimum pension.

The impact a partial pension commutation can have on a person’s transfer balance cap (TBC) is potentially being underplayed and not considered in the context of other SMSF strategies, such as downsizer contributions, a technical specialist has said.

During an industry webinar today, SuperGuardian education manager Tim Miller said the issue is something advisers need to consider since the government halved the minimum pension amount due to the coronavirus pandemic and where clients are still looking to sustain higher income levels from their SMSF established in prior years.

To this end, Miller suggested income drawdowns above the minimum pension should come in the form of partial pension commutations with a view to facilitate other strategies in future years.

“The key to partial commutations is that they will be debits to the transfer balance account. What that is going to do is it’s going to create [transfer balance] cap space from an estate planning point of view and potentially for future contribution benefits,” he said.

“I [say] that because I don’t think we’ve really come to appreciate the use, [or future use], of downsizer contributions.

“If we’ve got people currently sitting with $1.6 million in super … and they start their pension, and utilise their full transfer balance cap, they’re not going to get any entitlement to indexation.”

As such, he recommended partial commutations be used for drawdowns above the minimum pension if additional income is needed now because it will unlock benefits in the future.

Specifically, he noted the strategy would mean if in 10 to 20 years’ time, when a client might be in their mid to late 80s, they would then have the ability to maximise the benefits of making a downsizer contribution should they choose this course of action.

“There’s no real benefit in putting $300,000 into an accumulation interest and generating tax at 15 per cent on the earnings,” he said.

“But if they’ve got space in their transfer balance cap, if they’re putting that $300,000 in and commencing a pension in a tax-free environment … it’s going to provide member and taxation benefits for the fund at that time.”

Recent statistics from the ATO have also revealed an increase in the number of trustees failing who failed to meet pension payment standards in the 2018 financial year with the ATO stating many individuals that are commuting their pension may not understand their obligations.

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