Fund members with account-based pensions (ABP) have been reminded that while no limits apply to commutations made from that pension, there is an implicit restriction created by the minimum pension drawdown requirements, according to a superannuation lawyer.
SuperCentral special counsel Michael Hallinan said the ability to partially or fully commute an ABP was a useful tool to manage superannuation balances in pension phase, including rolling the balance over to another fund, and few restrictions applied apart from the minimum drawdown rules.
“The legislation governing account-based pensions imposes only one limitation on pension commutations, the purpose of which is to ensure that commutations cannot be used to bypass the pension drawdown rule,” Hallinan noted.
“The limitation where the pension is partially commuted is that the balance of the pension account after the partial commutation must be sufficient to satisfy the minimum drawdown requirement.
“The limitation where the pension is fully commuted is that sufficient pension payments must have been made at or before the full commutation to satisfy the minimum drawdown rule pro-rated to the date of commutation.”
He said any commutation must take into account pension payments already made in the financial year prior to the commutation and while there were similarities in the processes involved, a full commutation also required pensioners to consider the timing of that action.
As such, he used an example of a retired super fund member who had an ABP on 1 July 2023 with a $300,000 balance and a minimum drawdown requirement of $15,000.
He noted the maximum that could be commuted was $285,000 as the remainder would need to be retained for the minimum pension drawdown requirement and this would still apply even if a part pension payment had been made.
“If $6000 in pension payment has been made before the partial commutation, then the maximum commutation amount would be $285,000. Only $9000 in pension payments needs to be made in respect of the balance of the financial year as these future pension payments together with the pension payments already made will equal $15,000.
However, he highlighted the process for a full commutation was dependent on the period from 1 July 2023 to the date of commutation compared to the entire financial year.
“If the commutation occurred on 30 September 2023, then the maximum commutation amount would be $296,250 or about 98.75 per cent of the pension account balance prior to the full commutation,” he said.
“The significance of the date of the full commutation is that where a pension is fully commuted during a financial year, the minimum drawdown requirement is pro-rated for the number of days the pension was payable.
“So as the pension was payable for only 25 per cent of the financial year, the minimum drawdown requirement which applies is 25 per cent of the full-year requirement, which is $3750.”