May 2007: Super simplification and pension consolidation

In the past clients may have commenced a number of pensions for a whole range of reasons.

This could include commencing one or more pensions to qualify for either lump sum or pension Reasonable Benefit Limit (RBL) purposes or it may include non-rebatable pensions where the RBL was exceeded.

With the proposed abolition of the RBL, consolidation of some or all of these pensions may be valuable as it could result in a reduction in the cost of providing the pension. It may allow access to a larger crystallised pre July 1, 2007, component if the consolidation takes place prior to July 1, 2007.

In addition, it could provide access to more flexible types of pensions that are proposed to be available from July 1, 2007, or to enable the client to gain Centrelink benefits.

Before rushing in and consolidating a client’s pensions there are a number of things to consider such as the RBL implications of commencing pensions prior to July 1, 2007, and the effect of the crystallisation rules on the pension or pensions that have commenced.

Any RBL consequences of the commutation and rollover of the pension need to consider whether an excessive benefit or an increased excess would be created by the commutation and rollover.

The effect of the crystallisation rules would take into account any pre -July 1, 1983, component that may be incorporated in the pension components.

Under the RBL rules it is a requirement that any commutation and/or rollover of a pension prior to July 1, 2007, is reported to the Australian Taxation Office.

If the result of the commutation and rollover is an excessive benefit then it means any payment of the consolidated pension made prior to July 1, 2007, may end up being partly rebatable.

The timing of the consolidation may also be important as the commencement of an allocated pension or term allocated pension (TAP) on or after June 1, 2007 could mean that the first pension payment will not be necessary until the next financial year.

On June 30, 2007, the crystallisation of the pre July 1, 2007, component will mean that a member’s ‘superannuation interest’ will be valued and the dollar amount of the pre-component frozen.

To make maximum use of this opportunity where one or more pensions has a pre-July 1, 1983, component then consolidation of pensions may result in a greater pre component. Whether this will be to the advantage of the client depends on the circumstances.

Another consideration with consolidating pensions is the type of pension and the type of fund. Where a client wishes to consolidate a complying pension, such as lifetime, life expectancy or market linked pensions it should be remembered there are limitations that restrict the rollover to another complying pension.

This is further limited in the case of self-managed super funds that are not permitted to commence complying lifetime and life expectancy pensions.

Therefore it is only possible to rollover the complying pension to a TAP in a self-managed fund.

Where an allocated pension is involved it is possible to roll it over to another allocated pension or a TAP or from July 1, 2007, the new style of account-based pension.

It should be remembered that under the Simple Super legislation it is only possible to commence an allocated pension or a complying pension, where possible, up until September 19, 2007. From that time it will only be possible to rollover to a TAP or the new types of account-based pensions or annuities that are permitted under the legislation.

The types of pensions that can be commenced at various dates are illustrated in the table (found on page 19 of Technical Adviser May 2007 issue).

Graeme Colley is the superannuation strategy manager at Super Concepts.