News 05/06

Super Concepts e-SuperUpdate provides you with technical tips and updates on Self Managed Superannuation Fund topics of interest.

New rules for Term Allocated Pensions

In late September the Government announced changes to Market Linked Income Streams (MLIS), also known as Term Allocated Pensions, which will apply from 1 January 2006. 

Under the current rules MLIS can be taken for a fixed term between your life expectancy at the commencement of the pension and your life expectancy assuming you were five years younger when the pension commences.  If your pension is reversionary, that is, paid to your surviving spouse then the term can take into account a fixed term within their life expectancy or their life expectancy assuming they were five years younger.

From 1 January 2006 new rules will allow you to select a term between your life expectancy at the time the pension commences and age 100.  If the pension is reversionary then the term can include a term from your spouse’s life expectancy and when they reach age 100.

Currently a MLIS will run out once you or your spouse reach the end of the nominated term. While this can still occur under the new rules, a longer payment period can be selected.

Changes to Allocated Pension Factors

Another change from 1 January 2006 is to the maximum and minimum pension valuation factors for allocated pensions.  The reason for this change is to recognise the increase in life expectancies since the factors were published in 1992.

Recently, draft regulations were published to give us some indication of the new factors.  It is expected that these will be finalised prior to Christmas.  As an example, under the previous factors a person who was age 60 and commenced an allocated pension with $100,000 could elect to take a pension between $5,617 and $11,111.  Under the proposed new pension factors from 1 January 2006 that person could expect to commence an allocated pension ranging from $5,181 to $9,174.  This will allow the allocated pension to last for about two to three years longer than under the previous rules.

Contributions Splitting from 1 January 2006

Another change is the introduction of contributions splitting.  This will allow a person to split contributions made after 1 January 2006 with their spouse.  This is great news for those who have or expect to have Reasonable Benefit Limit (RBL) problems with their superannuation benefits.  Contributions splitting will allow a person and their spouse access to two RBL amounts as well as two post 55 Eligible Termination Payment tax free thresholds.

Currently, copies of draft regulations have been made available for comment and it is expected there may be some changes.  When the final legislation has been made available in the next month or two we will let you know the details so that you can consider whether it is worthwhile splitting post 1 January 2006 superannuation contributions with a spouse.

Transition to Retirement or Workplace Pensions

From 1 July 2005 new rules commenced which permitted you to start a pension after reaching your preservation age.  For most of us preservation age is 55.

The benefit of a workplace pension is that you can commence a pension while you are still working and at the same time reduce the number of hours you work.  In other cases you may just wish to increase the amount of income you receive.  Workplace pensions can be an answer to these and many more situations.  One added advantage of starting a workplace pension is that the income and capital gains on the assets which support the pension are tax free.

Workplace pensions provide you with a great deal of flexibility.  However, the only limitation is that you are unable to draw down lump sums from the pension until you meet the usual conditions of release, such as, retirement or reaching age 65.

Last chance for Lifetime and Life Expectancy Pensions from your SMSF

A lifetime or life expectancy pension can have a number of advantages if you have a balance in your fund in excess of the pension RBL of $1,238,440.  It can allow you to use the RBL compression strategy and may have some estate planning advantages.

From 11 May 2004 legislation was changed so that self managed superannuation funds and other small funds were not permitted to pay lifetime or life expectancy pensions.  However, transitional rules were put in place to allow those who were members of a fund as at 11 May 2004 and where certain rules are met to commence a lifetime or life expectancy pension before 1 January 2006.

If you wish to commence a lifetime or life expectancy pension before 1 January 2006 you need to satisfy the following rules:

• be a member of your self managed superannuation fund at 11 May 2004;
• trust deed must allow for defined benefit pensions at 11 May 2004;
• retire before 1 January 2006 or have reached 65;
• commence the pension before 1 January 2006; and
• make the first pension payment within a year from commencing the pension.

Prior to commencing the pension you also need to obtain advice from an actuary who is able to calculate the amount of your lifetime or life expectancy pension.  Super Concepts has a pension service which is able to assist you with a lifetime or life expectancy pension.