By Mark Ellem

When a member transfers their pension to another superannuation fund they are not actually rolling over the pension. Transfers from one superannuation fund to another are rollovers of accumulation accounts. The member does not rollover the pension, they transfer the benefits that were held within that pension as follows:

1. The member requests their pension to be fully commuted and the benefit rolled to another complying superannuation fund;
2. Trustees ensure that required minimum pension is paid prior to full commutation of the pension;
3. The pension ceases, with the benefits held within that pension included in of the member’s accumulation account. Note: a member of an SMSF can only have one accumulation interest (regulation 307-200.02 of the Income Tax Assessment Regulations 1997 (ITAR 97);
4. The member’s accumulation account is rolled over to the nominated complying superannuation fund;
5. The member requests the commencement of a new pension with relevant terms, e.g. reversionary. When this new pension commences, the relevant tax components of the new pension are calculated in accordance with the proportioning rule under section 307-125 of the Income Tax Assessment Act 1997 (ITAA 97).

As the new pension, in the rollover fund, is subject to re-calculation of the tax components, the member may end up with a different tax free and taxable component than the pension in the original SMSF. Consequently, where a member has multiple pensions, the timing of commutation of the pension and rollover of benefits is critical, where the goal is to preserve the original pension tax components.

Pension transfer example

Let’s consider the following scenario:

Sally has entitlements in her SMSF as follows:

• $250,000 in an accumulation account, of which $15,000 represents the tax free amount;

• $625,000 in a pension, which has a 100% tax free component.

Sally wishes to transfer her entitlements in the SMSF to another superannuation fund. How should Sally do this so that she retains her pension with a 100% tax free component? Should she:

1. Transfer both the pension and accumulation account at the same time?
2. Transfer the pension account first, then the accumulation?
3. Transfer the accumulation account first, then the pension?

Let’s first consider a transfer of both the accumulation and pension account at the same time. As noted, to transfer a pension to another superannuation fund, first it is fully commuted, which results in the benefits being held in an accumulation account. As an SMSF can only have one accumulation interest, the benefits held in the pension will mix with the existing accumulation account, as follows:

When the rollover is received by the new superannuation fund, the proportioning rule must be applied when the new pension is commenced and results in the following tax components for the pension and accumulation accounts:

We can see that the tax free percentage of the transferred pension has reduced from 100% to 73.14% as a proportion of the total benefits, being in an accumulation interest, must be split between taxable and tax free components for the new pension commenced.

The above split of tax components would also result where either of the other options for transfer are implemented. This is due to there being an accumulation interest either when the pension is fully commuted in the original fund, where the pension is transferred first, or an accumulation interest in the receiving fund, where the accumulation interest is transferred first. Consequently, to retain the same split of tax components when transferring a pension from one superannuation fund to another, there needs to be no accumulation interest in the current fund or the fund to which the benefits will be transferred. This could well be the case where the transfer is to a retail fund, for example, as accumulation and pension interests are often retained in separate funds.

In such a scenario, Sally would first transfer her accumulation account to the retail fund. She would then transfer her pension account to the retail fund. When the pension is fully commuted in the SMSF, as there is no accumulation interest held in the SMSF, the tax components of the pension will be effectively retained. When she rollovers the accumulation account, that was the pension, to the retail fund, as the benefits will be used to commenced a new pension it is often the case that they will be transferred to a separate sub fund of the retail fund and consequently will not mix with the rolled over accumulation account. As the new fund has no existing accumulation interest, when then new pension is commenced, the tax components will be the same as the original pension in the SMSF.

Where the accumulation and pension account is to be transferred to a new single fund, for example another SMSF or Small APRA Fund (SAF), again Sally would need to ensure that there is no accumulation interest held for her either in the SMSF when the pension is fully commuted, or in the new fund when it received the pension benefits as an accumulation interest rollover.

To achieve this, the following could be done:

1. Rollover Sally’s accumulation account to the new fund;
2. Start a pension in the new fund on the received rolled over accumulation account;
3. Fully commute Sally’s pension account in her current SMSF and rollover the accumulation account to the new fund;
4. Start a pension in the new fund on the received rollover of the accumulation account that represented the pension.

By doing this, Sally takes advantage of regulation 307-200.05 ITAR 1997 that confirms that pensions interests are separate interests for the purpose of the proportioning rule. That is, the first rollover of Sally’s accumulation account and subsequent commencement of a pension means that those benefits are excluded when determining the tax components when Sally commencing her second pension on the monies rolled over from her original SMSF that was supporting the pension in that fund.

As you can see, great care needs to be taken where the member wishes to preserve the tax components of an existing pension when they wish to transfer to another superannuation fund. This will mainly occur where a person currently has their superannuation entitlements in one or more non SMSFs and they setup their own SMSF and wish to transfer their benefits into the SMSF and those benefits consist of accumulation and pension accounts. Consider if Sally has 3 accumulation accounts across 3 superannuation funds and 4 pensions across another 4 separate superannuation funds and she wishes to transfer all of her benefits into her new SMSF and retain the current split of tax components for her pensions. In this scenario you would need to transfer first each pension account, one at time, ensuring one the pension was transferred into the new SMSF, as a rollover of accumulation benefits, and a pension commenced in the new SMSF, prior to rolling over the next pension. This could take some time to complete and consequently fluctuation in account value needs to be considered.