The date from which a pension will start is now more significant than ever due to the indexation measure soon to be applied to the general transfer balance cap (TBC), an SMSF specialist has said.
The general TBC is set to have indexation applied to it on 1 July 2021 and Accurium head of education Mark Ellem advised this date is going to be an important factor when considering when to start a retirement phase pension.
He illustrated his point using a scenario where a female employee aged 63 is retiring tomorrow and has superannuation entitlements of $2 million.
“She’s commencing her first retirement phase pension and is thinking about ‘when should I do this’,” Ellem said.
“Obviously if she commences it before 1 July 2021 the [maximum amount] of that $2 million she can put in retirement phase is $1.6 [million]. But if she waits [until] 1 July, she hasn’t got a transfer balance account at all because she hasn’t commenced a retirement phase pension up to and including 30 June 2021, she get full indexation [and a TBC of] $1.7 [million].
“So we need to consider for those clients who may be retiring now or about to retire, and [are wanting to] commence a retirement phase pension for the first time, that timing [for] when they should commence their pension.”
According to Ellem, similar consideration needs to be taken into account in situations where a member passes away with an accumulation account balance and/or a non-reversionary pension.
In these situations the deceased member’s benefits must be cashed out as soon as practicable which is often understood to mean within a 12 month period.
He demonstrated his point using a scenario where a member died with super benefits of $1.7 million, none of which was held within a reversionary pension, and the death benefit recipient being the other member of the fund who is too young to have commenced a retirement pension of their own.
“That balance can now be used to commence a death benefit pension,” Ellem noted.
“So what if they wanted to retain the maximum amount inside of super as a death benefit pension. Again the consequences of commencing this death benefit pension, cashing in the death benefit as required under the law, before 1 July 2021 or after 30 June 2021 [are significant].”
“If [the commencement of the death benefit pension] can be validly delayed until after 30 June 2021 then there [will be] an extra $100,000 that can be [used for the pension].”