A new era of flexible pensions

Now that the Superannuation Simplification rules have become law we are able to go forward with some degree of confidence with our client’s planning.

I say ‘some degree’, as we are still waiting for the finer points of some of the rules that will be contained in the relevant regulations, yet to be tabled in Parliament.

The hope is that the regulations will be tabled in the next few weeks to enable us to plan for our clients well in advance of June 30 this year.

One group of regulations that is eagerly awaited are those for the new type of account-based pensions that are proposed to commence from July 1, 2007.

These pensions will be designed to have a minimum annual amount determined by a percentage of the pension account balance of the pensioner.

There will be no maximum amount to the pension unless it is taken as a transition to retirement pension.

Draft regulations describing the new style of pensions were released by the Minister, Peter Dutton, on December 21, 2006, and other relevant drafts were released on February 27, 2007.

The main advantage of the new style pensions is their greater degree of flexibility compared to those currently available from superannuation.

The flexibility is complemented by the fact that from May 10, 2006, the rules for the compulsory payment of superannuation benefits were abolished, except on a member’s death.

This type of flexibility provides a client with the opportunity to leave some of their super in accumulation phase and draw down the remainder as a pension.

They may also wish to return all or part of the pension back to the accumulation phase at a particular time if a smaller pension is required or no pension at all is desired.

This means the amount left in accumulation phase can be reserved for contingencies such as moving house or aged care facilities and so on.

Compared to the other types of pensions, the new style pensions provide the greatest level of income stream flexibility from superannuation. Table 1 (see Money Mangement Magazine April 5, 2007 page 44) sets out the main features of the various income streams.

Under the proposed regulations, there are limits on when a particular type of pension can be commenced. Until June 30, 2007, there will be no change to the current types pensions commencing from superannuation. Between July 1 and September 20, 2007, it will be possible to commence all types of pensions from superannuation, including the new style pension.

However, from September 20, the type of pensions that can be commenced will be limited (see table 2 Money Management Magazine April 5, 2007 page 44).

One concern some clients may have is the longevity of the new-style pension.

If a person draws down the minimum amount required and the fund is able to produce a reasonable rate of return, say 7 per cent per annum net, they can expect to have an amount in their pension account in the fund at age 100 and beyond (see case study).

Under the proposed rules, it will be possible to nominate whether a particular drawdown from the new style pension is to be treated as income or as a lump sum.

According to the draft regulations, it will be necessary to nominate prior to receipt of a particular payment whether the drawdown is a lump sum. While the drawdown of an income or lump sum amount does not have a great impact for taxation purposes for a person 60 or older, it will have an impact for Centrelink income test purposes.

Whether it is worthwhile to commute a current pension, such as an allocated pension, to a new style pension depends on a number of factors. These would include the age of the pensioner, the timing of the commutation and the level of pre July 1, 1983, component in the pension.

It may be worthwhile in some cases to consider commutation prior to July 1, 2007, as the rules relating to crystallisation of the pre-July 1, 1983, component or the consolidation of pensions can take advantage of a greater exempt component. This may have advantages to those under 60 or for estate planning purposes where the benefit is ultimately paid to a non-dependant such as a child over 18 from July 1, 2007.

The new-style pensions available under the draft regulations amount to a much simpler way of thinking about income streams from superannuation, particularly from September 20, 2007.

However, in the interim, there are a number of considerations to ensure that clients benefit from the operation of the current rules up to June 30, 2007, and the rules that will operate between July 1 and September 19, this year.

Graeme Colley is technical manager at Super Concepts.