The absence of specific details around the commutation of market-linked pensions (MLP) to manage excesses under the transfer balance cap (TBC), despite government plans to make changes, is creating uncertainty for pension holders and advisers, according to the SMSF Association (SMSFA).
SMSFA technical manager Mary Simmons said the industry body was working with the federal government and the ATO to bring to life changes proposed in the December 2020 Mid-Year Economic and Fiscal Outlook (MYEFO) and while some information had been provided, more was needed so retirees could plan ahead.
“Restructured MLPs since 1 July 2017 continue to cause uncertainty for industry as we wait for detail on the government’s MYEFO announcement to allow retirees to partially commute these pensions to manage any excess under the TBC,” Simmons wrote in an article posted to the SMSFA’s website.
“This impacts all those retirees who relied in good faith on the original commutation formula and restructured into new MLPs any time after 1 July 2017.
“It also impacts on those retirees who want to exercise their right to commute their pre-1 July 2017 complying life expectancy pension or MLP to start a new MLP, but are hesitant, until there is clarity.”
She said while the SMSFA was still going through the details of the proposed change, it could confirm they would apply to retirees who have already restructured and also to future commutations where a retiree had a perpetual excess TBC and they had no other pensions that could be commuted to comply with the TBC rules.
The association was also seeking more information from the ATO about the operation of existing laws, particularly the formula used to calculate the value of the transfer balance account (TBA) debit on the commutation of an MLP, she added.
“More recently we’ve been seeking clarity on the ATO’s view when dealing with reversionary MLPs and we are pleased to see the ATO recently updated their website to confirm that where the income stream started to be paid to a reversionary beneficiary on or after 1 July 2017, only the benefits the reversionary beneficiary was entitled to receive are considered when calculating the value of the debit,” she said.
“This initial clarity is important for retirees in managing their TBA, particularly if they need to commute any existing account-based pensions to create cap space to receive a reversionary MLP.”
She said other discussions were continuing as the SMSFA was seeking to understand the mismatched timing of the reversionary credit and the commutation debit should a beneficiary, who is entitled to commute their MLP, do so within the first year of becoming entitled to the pension.
The current law creates a debit in the TBA of a reversionary beneficiary who is entitled to commute their MLP on the day the lump sum commutation is paid, she pointed out.
“In determining the value of the debit, the current formula relies on the value of the credit that relates to the pension being commuted. If we apply the ATO’s view that it is only the entitlement of the beneficiary that matters, then we need to rely on the credit that arises in the beneficiary’s TBA,” she said.
“The value of the reversionary beneficiary’s credit is not controversial and is calculated as at the date of death of the primary pensioner. However, no ‘credit’ arises in the beneficiary’s TBA until 12 months after the date of death of the primary pensioner.
“Therefore, where a reversionary beneficiary does commute their MLP within the first 12 months, the strict application of the ‘debit’ formula appears to deliver a negative result.
“Although this is likely to apply to only a minority of SMSFs, it has the potential to undermine policy intent and further clarity from the ATO is required to ensure there remain no inequities when commuting MLPs.”