Why You Should Only Ever Draw the Minimum Pension Payment

No, we’re not saying that you should restrict yourself to whatever your minimum pension payment is during a year, just that any excess you draw above that minimum should be treated as a partial commutation (and therefore a lump sum payment). 

Transfer Balance Cap Considerations

The TBC has numerous complexities, so please treat this summary as an overview, rather than a detailed guide.

The TBC represents the maximum amount that any client can ever put into pension phase.  At present, that is $1.6m.  It is structured such that you get to keep your gains, but have to “eat” your losses.  For example:

Pension Balance               $1,600,000

Add: Income                      $     90,000

Less: Pension                   ($    80,000)

Closing Balance                 $1,610,000

The law does not require you to take $10,000 out of pension phase at year end – you keep your gains.  However, if the following occurred:

Pension Balance               $1,600,000

Add: Income                      $      90,000

Less: Pension                   ($   120,000)

Closing Balance                 $1,570,000

You could not add another $30,000 to your pension account ever.  You “eat” your losses.  However, partial commutations of pensions do reduce your TBC.  So, if we did the following:

Pension Balance               $1,600,000

Add: Income                      $     90,000

Less: Pension                   ($    90,000)

Less: Partial Comm.         ($    30,000)

Closing Balance                $1,570,000

In that case, your TBC would be $1,600,000 – $30,000 = $1,570,000.  So, you could put an extra $30,000 into pension phase.  It all depends on whether that extra amount is classed as a pension, or a lump sum.

Logic would suggest that you should therefore only take the minimum pension payment each year and “partially commute” everything else.  However, the way Parliament has drafted the law means that any advice to this effect would be “financial advice”.  A person would need to be licensed to give it, and that licensed person would need to provide the client with a statement of advice to that effect.  Crazy?  Yes, but we have a solution.

Centrelink Treatment of Pre-2015 Income Streams

For any superannuation pensions/income streams which have a commencement date prior to 1 January 2015, Centrelink treats pension payments (“income”) and lump sums/partial commutations (“capital”) differently.  We all have clients affected by this.

An income payment is counted towards the income test and, depending on its level, can adversely affect the amount of social security pension a person is entitled to receive.  Not only that, but because a pensioner is required to report what they took after year end, if they have taken more than Centrelink expected them to take, they may have to pay back amounts already received, as well as suffering a reduced pension going forward.

It is therefore critical that we treat any payments above the minimum for such clients as partial commutations.  However, this advice now also requires a statement of advice.  Once again, Pro-Super’s deed upgrade solves this problem.