by Alicia Thomson

Some SMSFs may be experiencing falls in investment values due to the impact of COVID-19 which has impacted pension account balances.  Members with pension accounts might be considering  increasing their existing pension or commencing a new one.  Before doing this, it’s important they also consider the impact this can have on their Transfer Balance Cap (TBC) as this will dictate how much of their accumulation balance they can transfer to a pension account.

The TBC came into effect on 1 July 2017 and was introduced to limit the maximum amount an individual can use to commence retirement phase pensions across all their superannuation interests.  The TBC is currently $1.6 million and will be indexed periodically in $100,000 increments in line with CPI.  Members who have already met or exceeded their cap will not get the benefit of indexation. 

Trustees are required to report to the ATO events that impact a member’s TBC.  These events are reported to the ATO in a Transfer Balance Account Report.  The Transfer Balance Account records commencing, ceasing and commuting pensions.  Pension payments, investment gains and losses do not impact the TBA , so any fall in account values experienced due to COVID-19 would not increase the amount of cap space a member has. 

If a member does exceed the cap, the ATO will issue a determination with the excess amount that needs to be commuted back to accumulation along with any tax on the notional earnings on the excess. 

Limited strategies that can be applied to manage the transfer balance cap include:

• Taking only the required minimum from pension accounts with any excess treated as a commutation or lump sum from accumulation;
• Ensuring all income streams are established with a reversionary beneficiary to allow greatest flexibility in the event of death.

The current market presents an opportunity for people who may be able to commence a retirement phase income stream and would likely exceed their $1.6m cap.  By commencing a pension now when asset values are reduced, they may end up with a greater amount in pension than would have otherwise been possible.

You can’t ‘top up’ a pension, you start an additional pension or commute and recommence a new pension with a higher amount