SMSF members with market-linked pensions whose balances exceed the transfer balance cap may now have an exit route to greater flexibility, better tax outcomes and preferrable estate planning options.
When the transfer balance cap (TBC) was introduced in 2017 market-linked (or term-allocated) pensions (MLPs) were treated differently to normal account-based pensions. Because these income streams are non-commutable, it was not possible to roll back the excess above $1.6 million to get back under the TBC. Instead, the pension payments from large balance MLPs become taxable. Generally, fifty percent of the value of pension payments from MLPs and other capped defined benefit income streams (CDBISs) above the defined benefit income cap (currently $106,205 p.a. increasing to $118,750 at 1 July 2023) is fully assessable and taxed at the individual’s marginal tax rate.
While MLPs are classed as non-commutable income streams, it is possible to commute them if the proceeds are used to immediately start another MLP. MLPs commenced after 1 July 2017 are no longer CDBISs, meaning pension payments are no longer taxed under the defined benefit income cap. The downside is that the new pensions are assessed for transfer balance account (TBA) purposes under the account-based pension rules. MLPs whose balances at commencement are above the TBC may be liable for excess transfer balance tax and, until recently, there was no remedy.
Fortunately, legislation passed last year now allows MLPs started after 1 July 2017 to be partially commuted where they have an excess TBA amount. This means that it is now possible to restructure these pensions to avoid the often penal tax treatment imposed on large CDBISs.
A further patch up to the TBA legislation last year clarified how the commutation value should be calculated for legacy MLPs and means we now have greater certainty when advising clients with these pensions on how to best structure their affairs.
See our previous blog for more details on the changes: New rules permit certain SMSF legacy pensions to be commuted
The enabling legislation is now in place for you to advise your SMSF members with large MLPs on how to restructure their pensions. Done the right way, this can have significant benefits for your clients, including:
- Tax benefits – new MLPs are no longer classed as CDBISs meaning pension payments are no longer taxed
- Flexibility and liquidity – Capital can be freed up from the restrictive MLP structure, providing more flexibility to meet income needs
- Estate planning – MLPs are non-commutable meaning lump sums cannot be paid if a member is nearing the end of their life. Restructuring can allow more capital to be gifted to beneficiaries before death, potentially reducing superannuation death benefit taxes
This is high value advice for your high-net-worth clients.
Accurium can help
Accurium’s actuaries specialise in this complex area and have extensive experience supporting clients through the process of restructuring legacy pensions. We have helped a number of clients with large balance MLPs realise significant benefits by taking advantage of the new legislation.
We use our expertise to analyse the client scenario and provide a comprehensive report for accountants and advisers on the potential options available, the transfer balance cap implications and potential tax outcomes. We then support you as you implement the advice with your SMSF clients.
Get in touch today to see how we can help – email [email protected] or call 1800 203 123.