Pension rule changes represent opportunity
Clients wanting to commute a pension or annuity without having to make a compulsory draw down of a pro rata minimum amount should do so quickly.
New rules for allocated and complying pensions, which were to come into effect from July 1, have been postponed until October 1. Under the new rules, clients will have to take a pro rata minimum amount calculated on the number of days in the year the pension has been paid to the time they commute their pension or annuity.
For instance, if Jane, aged 65, opened an allocated pension account with $250,000 on October 15, 2003 and then chose some 27 days later on November 11 to commute the pension, she would end up having to take $1177.64 as a pension payment. If she had taken out the pension three weeks earlier, there would have been no requirement to take a compulsory pro rata payment.
The Federal Government has also moved the cut-off date for clients to buy an allocated pension or annuity without having to take a payment in that initial financial year.
In the past, the date has been April 1 and any pension bought after this date did not have to be drawn down for up to 15 months. Now that the date is June 1, the window of opportunity has been reduced to just 13 months.
This particular change was aimed at eliminating the practice of postponing payment of any of the allocated pension by continually commuting and taking out a new pension each year. This strategy allowed investors to have their money in growth investments within a tax-free environment.
Complying pensions and annuities, such as lifetime and life expectancy products, also face rule changes. A similar pro rata minimum payment will apply to complying pensions and annuities from October, although the pro rata amount will be based on the anniversary date of investing in the income stream.
In another move, there will be tighter controls for the commutation of complying pensions or annuities.
Under the current rules they can be commuted within the first six months of buying the product. However, the new rules will restrict the commutation of complying pensions that have commenced from the rollover of any pension or annuity.
After October 1, commutations can only take place when a complying pension or annuity is rolled over to another complying pension or annuity; on death of the pensioner or reversionary spouse; to pay a surcharge, following a divorce settlement, or as a result of exercising a ‘free-look’ period of the investment.
Just as with the allocated pensions and annuities, clients who are considering buying into or commuting a complying product should take advantage of this three-month window.
Since the current legislation is more flexible, it would make sense to act now rather than later. But that does not get away from the fact that income streams are probably the optimum way to finance retirement.
Graeme Colley is superannuation manager, Super Concepts.
Recommended for you
With an advice M&A deal taking around six months to enact, two experts have shared their tips on how buyers and sellers can avoid “deal fatigue” and prevent potential deals from collapsing.
Several financial advisers have been shortlisted in the ninth annual Women in Finance Awards 2025, to be held on 14 November.
Digital advice tools are on the rise, but licensees will need to ensure they still meet adviser obligations or potentially risk a class action if clients lose money from a rogue algorithm.
Shaw and Partners has merged with Sydney wealth manager Kennedy Partners Wealth, while Ord Minnett has hired a private wealth adviser from Morgan Stanley.
