Market-linked pension rollovers a trap

market-linked pension rollovers

Rolling over a market-linked pension from an SMSF can create hard-to-escape traps for members with low balances, as well as those with very high balances.

SMSF practitioners have been warned not to rush into rollovers from a market-linked pension (MLP) for a client as they may be unable to find somewhere to place the funds or may exceed the transfer balance cap (TBC), an SMSF technical expert has said.

Heffron technical services manager Leigh Mansell said her firm was regularly asked how to treat an MLP when an SMSF was being closed and while the simple answer was to commute its value, she noted there were strict rules as to how that could be done.

“It is possible to commute a MLP, but the commutation value must, under superannuation law, be used to commence another MLP or used to commence an old-style defined benefit-type pension, such as a complying lifetime pension or life expectancy pension,” Mansell said as part of a recent Heffron webinar.

“The hiccup we often get is finding a home for the money as the superannuation law only allows for a commutation in those circumstances where you commence one of these pensions.”

She pointed out there were only three institutions currently offering a new MLP and they had minimum balance requirements, making it difficult for SMSF members with small balances to start a new pension with those providers.

SMSFs with larger balances would not have the same problem, but could find themselves running into problems with regards to their TBC due to rules relating to MLPs established before 1 July 2017, she noted.

“We should keep in mind what we are dealing with when working with MLP, and if it was in existence before 1 July 2017, it is a special sort of pension for the purpose of the TBC,” she said.

“The title is actually a ‘capped defined benefit income stream’ and the value that counts towards the TBC is dictated by a formula and not the underlying account balance. So, what happens with clients with a MLP is that the value for cap purposes is way more than the actual underlying account balance.”

She said in the event the SMSF was wound up, and any rollovers from the market-linked pension went outside the fund, that value would be based on the original credit minus pension payments taken and would count toward their TBC from 1 July 2017 if the pension was set up before that date.

“Depending on where they sit with the new MLP, the value of that for cap purposes will be based on the underlying account balance as the rules are different for pensions after 1 July 2017 compared with those before that date,” she said.

“This means a practitioner could end up with a situation where someone has a MLP and has blown their TBC and there is no way of commuting the excess because you are not allowed to do so and then take a lump sum from the MLP.”

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