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11 steps for refreshing a pension

Posted By Tony Negline On In Technical | No Comments

Refreshing pensions in super funds is an old trick but one that is important for people who are taking a pension from their fund but still wanting to make a super contribution.

Refreshing is the term used to describe rolling back one or more pensions combining the account balance with accumulation money in the same fund and then commencing a new pension.

There are three reasons to contemplate these transactions – injecting new capital into a pension, reducing the tax applying to the accumulation assets and avoiding the additional costs of running two or more pensions.

We recently received a good question about pension refreshing from a Switzer Super Report reader:

“I am receiving a pension from my SMSF and also have an accumulation interest in the fund because of contributions made in the past year.

“I would like to “refresh” my pension on 1 July. Apart from the member requesting the ‘refresh’ and a repeat of the normal pension process where the trustees meet and approve, what other paperwork is needed and what is the step-by-step process?

“Must my existing pension be commuted on 30 June and the new pension commenced on 1 July? Is this true or is the one day of all-accumulation mode not worth the trouble? I need to get an actuarial certificate each year anyway because I have unsegregated assets (I always leave a bit in accumulation mode).

Can you rollback your existing pension?

Most pensions, which were commenced in the last 15 years, can be refreshed, including Transition to Retirement pensions. In some rare cases, the rules of a pension don’t allow it to be stopped for any reason, and before embarking on refreshing a pension you should check your pension documentation, including the superannuation fund’s trust deed.

Pension payments

Before a pension is rolled back, the pro-rata minimum pension must have been paid. In addition, if the whole account balance isn’t rolled back, then the superannuation laws don’t allow the minimum amount to be recalculated.

If all of a pension’s account balance is refreshed, then all future income payments from the original pension will obviously cease.

Contribution issues

The amount transferred back to the accumulation phase won’t be a contribution for superannuation law purposes. This means that the superannuation law contribution rules (especially relevant for those aged at least 65 who need to satisfy a work test) don’t need to be satisfied.

If the accumulation amount being added to the pension will include a personal contribution that will be claimed as a tax deduction, then you need to make sure that all the relevant paper work has been completed before the new pension commences. If you forget or ignore this step, then you won’t be able to claim the personal contributions as a tax deduction.

Your super fund should prepare for the cash flow impact of the payment of contributions tax including, if relevant, excess concessional and non-concessional contributions tax.

In some cases, you won’t want to include these contribution tax payments in the account balance of the new pension because when the bill for the payment of the taxes arrives, part of the pension will have to be cashed out but there will be no corresponding adjustment to the required minimum income payment (refer above).

Preservation issues

The pension’s preservation status will remain unchanged. This means any preserved benefit, which is used to pay a transition to retirement pension, will remain a preserved benefit.

Tax-free and taxable component calculation

If you have an accumulation interest in your SMSF, then the rolled back pension account balance and the accumulation interest will form a single accumulation interest. The tax-free percentage of each future income payment will be based on the tax-free component of this single accumulation interest.

Segregated assets

This is not relevant for our reader, however, if your fund has segregated pension and non-pension assets in the superannuation fund’s financial accounts they you’ll need to make sure that appropriate assets have moved between the pension and non-pension segregations. This process can be messy especially when you’re dealing with a large number of assets.

Timing of commutation and commencing of new pension

You can do this refresh whenever you like but performing these on the last day of one financial year and the beginning of the next financial year keeps all this nice and neat. I would have a chat to your administrator. If they perform these tasks for less money on 30 June, then that might be an issue for you. Otherwise I would do this when of most convenience to your own circumstances.

11 steps for refreshing a pension

  1. Member requests merging of accumulation and pension assets.
  2. The trustee confirms entitlement to commute the existing pension and commence the merged pension.
  3. If required, the trustee works out what the pro-rata minimum pension payment should be just before the original pension is commuted.
  4. If necessary, the trustee and member exchange paperwork for personal super contributions tax deductions.
  5. The trustee closes out the existing pension account and adjusts SMSF financial accounts, if asset segregation used.
  6. The trustee opens a new pension account.
  7. The trustee adjusts the member’s accumulation interest.
  8. The trustee commences the new pension.
  9. The trustee determines the new pension’s tax-free component and pension minimum income amount.
  10. The trustee issues pension documentation.
  11. If required, the trustee re-segregates pension assets.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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