Happy New Financial Year!
Today, market-linked pensions have stopped being “capped defined benefit income streams”. This blog looks at whether this can be used to your client’s advantage. I emphasize at outset that we are short on detail and precedent of the ATO’s attitude. I certainly will not be implementing the strategy below without a few private rulings before taking action.
Let us take an example. Bruce is aged 79 next birthday. He is single. Before 30/06/2017 he swapped a 1.06(2) lifetime pension for a market-linked pension. He used the whole amount backing the $140,000 p.a. lifetime pension to start the market-linked. This was $2m. This had two advantages. Firstly, the best estimate of the lifetime pension of $1.1m for Exempt Current Pension Income increased to $2m towards ECPI. Secondly, utilizing the 10% variation that is permissible for market-linked pensions, we can reduce the amount being added to personal income. With the lifetime pension, it was 50% of $40,000 (or $20,000). With the market-linked pension payment it is $2,000,000 x .9/14.70 = $122,450 for a 21-year duration – the maximum duration allowed. It meets the new pension minimum payment rule. Now $11,225 is added to assessable personal income. This was very handy because with other income it brought Bruce’s income below the tax-free threshold.
The question is what more can be done? The transfer balance cap works with debits and credits to a personal TBC account. If one rolls back the market-linked pension in early July or August, it may have a 21 x $122,450 = $2,571,450 reversal to the account. As the TBC is now based on account balance and not remaining term, then one could release $571,450 of accumulation monies back to an exempt ABP. The ECPI position of the fund would be improved and the capped defined benefit excess amount to personal income would be eliminated.
The regulators should have based market-linked TBC on account balance. They did not. The above is logical. The TBC limit is only tested at pension start. Many ABP’s limited to $1.6m at 30/06/2017 could have a balance for ECPI purposes of more than $1.6m in subsequent years if 4% drawdowns are below the fund earning rate.
While the above is logical and a sensible way to optimize outcomes for market-linked pensions, I again emphasize that one would want to get the strategy confirmed by the ATO via a private ruling. Any volunteers?
NetActuary will be placing a considerable effort this financial year on legacy pension aspects. You may be concerned that mid-year changes like this will complicate the actuarial certificates for 2017-18. NetActuary provides a guarantee that we will prepare the 2017-18 certificate at year end for no more than your current cost if we have assisted with a tax optimisation strategy. In many cases, it may be less because the type of certificate needed will no longer be an “adequacy” type but merely an ECPI percentage type.
For more details, contact Brian on (03) 6224 1145 or by email firstname.lastname@example.org