Why do pension payments now need to be paid in cash? I’m sure my clients used to be able to take in-specie pension payments.

Well, in fact pension payments have always needed to be paid in cash. Only lump sums can be taken in-specie (ie in the form of assets rather than cash). Whilst it may have appeared in the past as though your clients were taking in-specie pension payments, the payments would have in fact been in-specie lump sums. Let me explain.

The term “lump sum” is specifically defined in the superannuation legislation as “including an asset” [SIS Reg 6.01(2)]. This means lump sums can be paid in-specie. However, there is no similar definition stating that the term “pension payment” includes an asset. As a result, the Regulators take the view that a pension payment cannot be paid in-specie (ie only cash pension payments are permitted).

Anyone with an account-based pension (or a TRIS) that includes some unpreserved money can take a lump sum commutation from their pension, and the lump sum can be an in-specie payment. 

Whilst this lump sum payment may feel like a pension payment, it’s actually a lump sum commutation and must be documented that way. This is simply because only cash payments can be treated as pension payments. This rule has not changed.

The superannuation legislation also requires that a minimum amount is paid each year from a pension account (eg 4% of the individual’s 1 July balance for those under age 65) [SIS Reg 1.06(9A)(a)]. This requirement is commonly referred to as the “minimum payment rules”.

Prior to 1 July 2017, almost all payments from a pension account could count towards satisfying the minimum payment rules, including both cash payments and lump sum commutations (including in-specie lump sums).

However, the rules about “what counts towards the minimum” changed effective 1 July 2017 and lump sum commutations no longer count towards satisfying the minimum payment rules. That is, only pension payments can now satisfy the minimum payment rules and pension payments can only be taken as cash payments.

In a nutshell, this means in-specie lump sum commutations from pension accounts are still permitted (providing the member has unpreserved money and the terms of the pension allow a lump sum commutation) but, to satisfy the pension rules, since 1 July 2017 a cash payment of the minimum required amount is also needed.

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