In recent days the Government announced a handful of proposed technical changes to the taxation law to address a number of minor but important issues affecting some retirees. We cover two of these proposed changes below.
Valuation of Defined Benefit Pensions
Since 1 July 2017, whenever an individual commences a retirement phase pension the “value” of that pension is counted towards their $1.6m Transfer Balance Cap. For account based pensions, the “value” for this purpose is simply the starting value of the pension.
However, for some defined benefit pensions (eg lifetime, life expectancy pensions), the legislation provides a formula instead. One of the components in this formula is the pension’s annual entitlement which, in simple terms, is worked out by annualising the first payment the individual receives from the income stream.
For some schemes, particularly say public sector schemes, the pension payments to a reversionary pensioner may temporarily be paid at a higher rate for a period of time, after which there is a permanent reduction in the payments. For example, the payments made to a surviving spouse for 4 weeks after the original pensioner’s death are equal to what the original pensioner was receiving and then payments reduce to say 70% of the original amount.
Under current law, the amount counted towards the surviving spouse’s Transfer Balance Cap will be based on the first (ie higher) payment the spouse receives. This is the case even though shortly thereafter there will be a permanent reduction in the payments received.
The Government has proposed amending the rules for valuing these pensions so individuals are not disadvantaged when permanent reductions in the payments occur.
Stopping & Restarting Market Linked Pensions Post 1 July 2017
As mentioned in Meg Heffron’s June blog article (https://www.heffron.com.au/blog/article/market-linked-pension-update), up until recently there had been uncertainty around the Transfer Balance Cap treatment of the commutation of market linked pensions (eg where the proceeds are rolled over and used to commence a new market linked pension in another fund or even in the same fund). In short, an unintended consequence of the 1 July 2017 changes meant that stopping and restarting the pension in this way could have caused the individual to exceed their cap. This is because the commutation of the pension arguably didn’t result in a reduction in the amount counted against their transfer balance account but the commencement of the new pension was still counted.
The ATO addressed this in August by announcing that they would essentially administer the law as was originally intended [CRT Alert 066/2018] by agreeing to not take compliance action if the stop & restart of the pension is not reported at all or those events are reported but the values used are modified appropriately.
The Government has now announced that they are committed to finding a more permanent legislative solution to this problem by amending the way in which the commutation of these pensions are valued for the purposes of the Transfer Balance Cap.
Whilst irrelevant for many retirees, these changes will be welcome news for those who were inadvertently impacted by the drafting of the original reforms.