The new simple account-based pension
From 1 July 2007, the Superannuation Industry (Supervision) Regulations (SISR) will provide for a simple form of account-based pension with five basic requirements1:
- Each year, at least one payment must be made to the member.
- Each year, the total pension benefits paid to a member must satisfy minimum amounts based not on the pensioner's life expectancy (as used to be the case) but simply on the pensioner's current age. For instance, a pensioner aged 63 on 1 July during a year of the pension must be paid 4% of the pension's account balance and a pensioner aged 83 on the same day must be paid 7%.
- The pension's capital value, and the income from it, cannot be used for borrowing.
- The pension can only be commuted in certain circumstances, including on the death of the pensioner or if the minimum amount of pension payments for the year have been made.
Where's the catch?
"So that's it then. Seems simple as can be?"
True, but it becomes a little more complex when any of the following factors are considered:
- From 1 July 2007 to 19 September 2007, 3 forms of account based pensions will be available. First, the new pension; Second, the existing form of allocation pension; Third, the existing form of market-linked (or 'term allocated') pension. (Although the law allows 3 types of pension, there is very little reason to choose an Allocated Pension given that the new simple pension is now available. So Cleardocs is no longer providing the Allocated Pension.);
- Planning for reversion of the pension; and
- Death benefits consequences (where there's no reversion), on death of the pensioner.
The transitional rules for account-based pensions - a snapshot
|The dates||The options|
|Between 1 July 2007 to 19 September 2007|| |
a person can commence
|After 20 September 2007||a person can commence only a new simple pension.|
An advantage for market-linked pensions commencing before 20 September 2007
Starting a market-linked pension before 20 September 2007 will improve some people's chances of receiving a part or full aged pension. This is because market-linked pensions are 'complying pensions', and half of the capital used to fund the pension is excluded from the aged-pension assets test.
From 20 September 2007, this assets test concession ends for pensions commenced on or after that date (along with the ability to pay a market-linked pension). So it may definitely be worth some people considering commencing a market-linked pension before 20 September 2007.
Choosing which pension to commence between 1 July 2007 and 19 September 2007
So there are three types of pensions which a person may commence to receive between 1 July 2007 and 19 September 2007. The new simpler pension and the old allocated and market linked pensions. The considerations are:
- There would be little point in commencing an allocated pension in preference to a new simple pension. This is because:
- both are non-complying pensions for the purposes of the aged pension assets test and operate in similar ways; and
- the simple pension is simpler to administer and (in contrast to the allocated pension) does not have a maximum amount which may be withdrawn each year.
- There is a good reason to commence a market-linked pension before 20 September 2007. Doing so may make a person eligible for (or increase their eligibility for) a part or full aged pension. However, there are important disincentives for commencing a market-linked pension rather than a simple pension. The reasons are that the market linked pension is more complex to understand and to administer and there are severe restrictions on when it can be commuted to a lump sum.
Planning to make sure the reversion of the pension succeeds
From 1 July 2007, sub-regulation 6.21(2A) of SISR provides that a death benefit may only revert to a person in the form of a pension if:
- The person is a 'dependant' of the pensioner as defined by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS) (SIS dependant); and
- For a dependant who is a child, the child is:
- less than 18;
- between 18 and 25 and financially dependent; or
- has a disability2; and
- The pension being paid to a child (other than to a child with a disability referred to above) is commuted to a lump sum when the child turns 25.
Therefore, the class of persons who are dependants for the purposes of receiving a pension is narrower than those who are generally considered as SIS dependants. This is because of the restrictive treatment of eligible children. We will call these people pension dependants.
- that a death benefit in the form of a reversionary pension may only be paid as a pension to a pension dependant, and
- that rules for the provision of a pension do not meet the standards set out in SISR if 'the rules result in the pension being transferred to a person who would not be eligible to be paid a benefit in the form of a pension' - that is, to a person who is not a pension dependant.
Thankfully, the rules of the pension will only be deemed to not meet the standards if they 'result' in the pension being transferred to a non-pension dependant. So even if an existing pension provides that the pension is to revert to someone other than a pension dependant, the standards will still be met if the rules do not 'result' in the pension reverting to a non-pension-dependant. This may require an over-reaching clause in the pension payment agreement to the effect that the pension will be paid in accordance with superannuation law, or a specific amendment to the pension payment agreement.
Death benefits other than reversionary pensions
For information on the new rules concerning the payment of death benefits generally, see [Danni to insert link]. As mentioned above, these rules affect pension planning because, if the pension does not or cannot revert to a pension dependant, then the tax free component and taxable component of the pension will be relevant to the amount of tax payable when the benefits are paid to any other eligible SIS dependant.
...but the Regulations are still in draft!
At the date this article went to publication, the regulations containing the new rules concerning pensions were still in draft, although the consultation period had ended. We will keep ClearLaw readers up to date with the progress of these changes.
For more information:
- in relation to this article please contact Julian Smith on 03 9288 0555.
- on Simpler Super generally, please contact Maddocks on 03 9288 0555 or 02 8223 4100 and ask for a member of the Maddocks Superannuation Team.