What to consider before topping up or starting a new pension

SMSF members facing investment losses due to the impacts of an economic recession may be considering topping up their pension account, or starting a new pension.

However, before taking action, SMSF members should be aware of the consequences this could have on their transfer balance cap. The transfer balance cap applies to the total amount of superannuation transferred into an individual’s retirement phase.

Individuals with existing pensions worth $1.6 million or more cannot start a new pension without exceeding the transfer balance cap, regardless of whether their current pension’s value has been reduced due to investment losses.

Members who wish to top up their pension by rolling it back and adding funds before starting a new pension may be restricted, depending on the size of the debit they get when commuting their existing pension. If individuals wish to proceed with starting an additional pension, they will need to commute the excess balance and pay excess transfer balance tax.

Members who wish to top up or start a new pension must first identify how much cap space they currently have, and how much cap space they will have once they commute their pension. They should also consider whether credits from reversionary income streams over the next 12 months will affect their transfer balance account.

Members considering rolling back an existing pension should consider how this may affect Centrelink benefits. Where existing pensions are grandfathered under previous Centrelink provisions, ceasing the pension may result in a reduction of Centrelink benefits. In some circumstances, there may be a benefit to ceasing a pension.

Estate planning is also an important consideration when establishment pensions. Adding or changing a reversionary beneficiary can be achieved by ceasing and restarting a pension. Combined with a valid binding death benefit nomination, this can add assurance that benefits will be directed to the Member’s desired beneficiary.

Should you have any queries, please contact our office to discuss your options.

Disclaimer: This article contains general information only. Regrettably, no responsibility can be accepted for errors, omissions or possible misleading statements or for any action taken as a result of any material in this guide. It is not designed to be a substitute for professional advice, as such a brief guide cannot hope to cover all circumstances and conditions applying to the law as it relates to these items.