By Mark Ellem
More flexibility is on the cards for transition-to-retirement income streams.
On 12 February 2018 Treasury released for consultation a proposed change to ensure that a reversionary transition-to-retirement income stream (TRIS) will always be allowed to automatically transfer to eligible dependants upon the death of the original pension recipient. Under current law, a reversionary TRIS can only revert to a reversionary beneficiary where the reversionary beneficiary satisfies a ‘condition of release’ (CoR) with a ‘nil cashing restriction’; being ‘retired’; age 65; terminal medical condition or permanent incapacity.
Consequently, where a reversionary beneficiary did not satisfy a CoR with nil cashing restriction (other than attaining age 65 which is an automatic CoR), the TRIS could not revert. In this scenario, where the death benefit was to be paid as a death benefit income stream to a surviving spouse, for example, the TRIS would cease and a new account-based pension would need to be commenced. In addition to the paperwork, calculating member balances and ensuring the pro-rated minimum pension had been paid for the year, this could also result in the mixing of tax components, where the surviving spouse also had an accumulation account within the same fund.
Let’s consider the following example:
Mike is 60 and currently has a TRIS. He has not yet retired and consequently, the TRIS is not a retirement phase pension. Mike’s TRIS, when established, included an automatic reversion to his spouse, Rachael, upon death. Rachael is aged 45 and currently works full time in a legal firm.
Under current law, if Mike was to die, his TRIS could not automatically revert to Rachel unless she has satisfied a CoR with a nil cashing restriction. This would also be the case even where Mike died after attaining age 65. Yes, his TRIS would now be a retirement phase pension, however, Rachael, being 50, may still not have satisfied a CoR with a nil cashing restriction. If Mike’s death benefit was to be paid to Rachael as a death benefit income stream, this would have to be done as a new death benefit account-based pension.
The proposed amendment will ensure that a TRIS that has been set up with an automatic reversion on death, can always continue to a reversionary beneficiary, after the death of the original TRIS recipient. Of course, the reversionary beneficiary must also satisfy SIS regulation 6.21(2A), that is, be a SIS dependant of the deceased member and if a child, comply with the relevant requirements in sub-regulation 6.21(2A)(b).
If enacted as proposed, for Mike and Rachael, this means that Mike’s TRIS can automatically revert to Rachael on his death, regardless of whether she has met a CoR with a nil cashing restriction. However, whilst this means that a TRIS in retirement phase will have the same characteristics as an account-based pension (ABP), a TRIS cannot automatically convert to an ABP. So, when Mike attains age 65, his TRIS will be a ‘TRIS in retirement phase’, it will not become an ABP, unless he fully commutes his TRIS and re-starts as an ABP. When reporting, including issuing an annual member statement for Mike’s TRIS, the statement will continue to show that it’s a TRIS and not an ABP, even though the TRIS will not have a 10% maximum pension limit or restriction on commutations, as all his benefits will be ‘unrestricted non-preserved’. This will be the case unless the 10% maximum pension limit and other conditions specific to a TRIS have been hardcoded, or implied, in the original pension documentation.
Further, as a consequence of Mike attaining age 65 and his TRIS moving into retirement phase, his fund will have a transfer balance cap event that will need to be reported to the ATO and the TRIS will also be an eligible pension when it comes to the fund claiming exempt current pension income.
Submissions on the proposed amendment closed on 23 February. Further information can be found on the Treasury website.
