By Philip La Greca

As part of the Government’s Mid-Year Economic and Fiscal Outlook, a proposal was outlined to permit commutations to be made from previously non-commutable market linked pensions, life expectancy pensions and similar products such that they are no longer in excess of their Transfer Balance Cap (TBC).

The measure will involve the commutation of the “old” income stream and the commencement of a new income stream that is within the TBC with the difference being able to be commuted to a lump sum. This measure will need to be an ongoing mechanism to deal with those existing persons whose non commutable income steams are greater than their TBC but also to cater for reversionary pensions that can also trigger this outcome.

Critically this facility needs to be provided to all persons who have an excess from an existing non-commutable income stream not just those in SMSFs, otherwise there would be an argument that SMSF members are seeking/obtaining special treatment.

For this to work the ability to commute these income steams should only be available firstly if the member has no other commutable income streams. Secondly the commutations amount should be calculated by the ATO as with any excess with the only difference being where the existing non-commutable income stream can be maintained then the commutation should specify the annual pension reduction rather than a lump sum amount.

For SMSFs this would mean that for a market linked pension that commenced prior to 1 July 2017 would commute an amount based on the annual pension reduction multiplied by a factor from Schedule 7 while those market linked pensions that commenced after 1 July 2017 would be commuting a lump sum amount. For non-commutable lifetime or term pensions then the commutation amount would be based on amount of pension reduction needed to value the pension within the TBC.

While the proposed measure alleviates the concern about excessive amounts and reduces the need for SMSF to deal with PAYG obligations for these pension types there is still a burning issue that is unsolved - what to do when the amount of assets supporting a non-commutable pension becomes so low that the cost of running the pension is too high?

So while there are benefits, the proposed measure is not the cure-all for defined benefit pension issues in its current form. We shall have to stay tuned to see how it plays out.