No rollover options for SMSF defined benefit members

For those SMSFs that have a member with a legacy complying defined benefit pension, a wind up of the SMSF will require them to rollover their pension to either an APRA regulated fund that provides a complying pension or to an institution that provides a retail annuity. However, they may find that there are no such funds or institutions that have such products any longer. This may not only mean the SMSF cannot be wound up, but can also result in the loss of Age Pension and Centrelink benefits for the member.

Complying defined benefit pensions are non-commutable except to rollover to another complying pension (or in other limited circumstances defined in legislation, such as a divorce settlement payment). Consequently, where an SMSF is to be wound up, a member that has one of these pensions must rollover to another complying pension. Over the last number of years, generally, there were two options considered for the rollover of a complying defined benefit pension:

  1. Commute to a retail complying annuity; or
  2. Commute to a market linked pension.

Where the complying defined benefit pension is a 100% asset test exempt (ATE) pension for Centrelink purposes and retaining the ATE status is a key priority for the SMSF member, the trustee could roll out the assets supporting the complying defined benefit pension to purchase a complying annuity with a life office. As the ATE is retained, this option minimises the impact on the member’s age pension entitlements.

A complying annuity provides an income stream for the person’s lifetime or fixed term, and is held in the individual’s name outside the SMSF. To meet the requirements of being a complying pension, the annuity must be non-commutable. However, a benefit may be available on the death of the member (generally equal to the present value of the remaining payments).

Looking at the second option, a market linked pension is the only type of complying pension that can be commenced in an SMSF. Commuting the existing complying pension into a market linked pension would allow the member to retain the assets within the SMSF. It would also allow for SMSF members to rollover their complying defined benefit pension to an APRA regulated fund or a retail provider of a market linked pension. Such pensions provided by APRA regulated funds and institutions are commonly referred to as a term allocated pension (TAP).

Whether the new market linked pension or TAP will retain the original pension’s ATE status will depend on the commencement date of the existing pension. Generally, only pensions that had a 50% ATE status can retain that status once they are rolled over to a market linked pension or TAP1. These are qualifying pensions that commenced on or after 20 September 2004, but no later than 19 September 2007. As 19 September 2004 is the birth date for market linked pensions, generally all complying pensions commenced on or after this date were market linked pensions and not a defined benefit pension. Note, an SMSF could not commence a defined benefit pension after 31 December 2005.

Why do SMSF members cease their complying defined benefit pension?

There are generally two reasons for an SMSF member to cease their complying defined benefit pension:

  1. They no longer want or are able to deal the administrative complexity of running an SMSF;
  2. They are unable to obtain a satisfactory solvency certificate from an actuary for Centrelink purposes (high probability basis) and/or for SIS purposes (best estimate basis).

An SMSF member may also wish to restructure their complying defined benefit pension to a market linked pension for estate planning purposes.

The retail annuity option – is it still available?

As previously noted, over the last number of years, where an SMSF member’s complying defined benefit pension was a 100% ATE and they wish to retain that Centrelink status, generally, the only option was for the pension to be rolled over to a complying retail annuity with an institution. However, our understanding is that there is no longer any institution or APRA regulated fund with such a complying pension product still open. If this is the case, then a rollover of the SMSF member’s complying defined benefit pension will have to be to a market linked pension, which will likely result in loss of ATE status and may affect their future Centrelink entitlements.

This not only affects those who wish to make a choice to wind up their SMSF, but also those where they cannot obtain the relevant actuarial solvency certificate. Given the time of the year, SMSFs with 100% ATE complying defined benefit pension members need to finalise financial statements for 2020-21, obtain the actuarial solvency certificate and provide to Centrelink. Generally, to retain the 100% ATE status of the complying defined benefit pension, the relevant actuarial solvency certificate is required to be completed each year by 29 December and submitted to Centrelink by 19 January.

Not a Centrelink defined benefit pension – still issues

Where Centrelink concessions are not a concern for the SMSF member, to enable the wind up of the SMSF, they would have the option to rollover their complying defined benefit pension to an APRA regulated fund to commence a new market linked pension or to an institution to commence a retail TAP. However, we are aware that a number providers of these pensions will only accept monies from a rollover of a complying pension where that pension did or would have qualified for the 50% ATE status and not for the 100% ATE status. This means that they will only accept the rollover of a complying pension that commenced on or after 20 September 2004 and no later than 19 September 2007.

Fortunately, for now there remains at least one provider of a TAP that does not have any restrictions, other than the requirements to comply with the relevant provisions of SIS. This is good news for those SMSF members who have a defined benefit lifetime complying pension and wish to wind up their SMSF. However, given our research has found several providers of a TAP ceased their product over the previous 12 to 18 months, these current TAP options may not be around for too long.

Where there is no non-SMSF option for an SMSF member with a complying defined benefit pension who fails the Centrelink solvency requirement, they will have no option but to restructure the pension to a market linked pension within the SMSF. They will not retain any ATE status and they will not be able to wind up the SMSF.

Two-year exit measure – is it a solution?

The proposed two year legacy pension exit measure appears to provide an option to allow a member with a complying defined benefit pension to wind up their SMSF. However, this will depend upon the actual wording of the legislation, which we are yet to see. Further, how the measure will operate, together with any tax implications, may influence whether or not an individual takes up the measure.

As noted in the budget fact sheets regarding this proposed measure, a member who takes advantage of it will lose any Centrelink ATE status. Consequently, an SMSF member who wants to retain their complying defined benefit pension 100% ATE status, may have to continue their SMSF until the term of the pension ends.

Whilst this potentially affects only a small cohort of SMSF clients, having an extremely limited option or in fact no option to either exit an SMSF or retain 100% ATE status, is not desirable. We are not aware if Government is themselves aware of this potential predicament for some SMSFs. We would also be happy to hear from any institution or superannuation fund that could provide a solution for affected SMSFs members. There may be a few in need come January 2022.

1. 100% ATE pension may be able to retain a 50% ATEstatus in certain circumstances – refer Social Security Guidelines

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