The partial commutation of an account based pension is where a portion of the capital value of the pension is withdrawn or rolled back to superannuation accumulation phase or withdrawn from super entirely.
Partial commutations of account based pensions are usually made when the pension recipient wants to access a lump sum from their pension in excess of the pension income being received.
A partial commutation of an account based pension may also be made when the pension recipient wants to to roll back part of their pension balance to accumulation phase, so that less is held in pension phase.
Partial Commutation of Account Based Pension Example
If a 66 year old has an account based pension balance of, say, $500,000 on 1 July, they would be required to draw a minimum income for the current financial year equal to 5% of the account balance, or $25,000, based on the minimum pension standards.
The maximum income that they would be able to nominate to receive in the financial year would only be limited by their account balance (i.e. $500,000).
Due to there not being a maximum income cap for account based pensions, commutations are becoming less necessary, because an individual can simply nominate at any time to receive and increased pension payment, even if it’s just a one-off; which can provide them with the lump sum they require.
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While the increased income would, subject to earnings within the account, reduce the pension balance, it would not be considered a commutation of the capital value of the pension.
Furthermore, due to account based pensions commenced after 1 January 2015 not being covered under the grandfathering provisions and not assessed using the deductible amount method, increased income payments for post-1 January 2015 pensions will not affect Age Pension payments or aged care fees.
However, if a partial commutation of an account based pension was made (instead of simply nominating to receive an increased pension) it would reduce the capital value of the pension for Transfer Balance Cap purposes and Centrelink assessment of grandfathered pre-1 January 2015 account based pensions.
Commutations and the Transfer Balance Cap
The Transfer Balance Cap, which came into affect on 1 July 2017, permits no more than $1.6 million (indexed) to be transferred into an account based pension.
The Transfer Balance Cap works on a credit and debit method.
Any amount used to commence and account based pension from an accumulation account is considered a credit and counts towards the Transfer Balance Cap.
Commutations from an account based pension will be considered a debit on the Transfer Balance Cap, which can increase your available cap space.
For example, if someone commences an account based pension with $900,000, they will have used up $900,000 of the $1,600,000 Transfer Balance Cap.
If that person then, later, makes a commutation of $50,000, their Transfer Balance Cap ‘used amount’ will reduce to $850,000 – increasing the available cap balance.
Commutations and Centrelink
Post-1 January 2015 Account Based Pensions
If a commutation was made from a post-January 2015 account based pension, it will simply reduce the balance of the account based pension for asset purposes under the ‘assets test‘ and reduce the balance for deeming purposes under the ‘income test‘.
However, the amount commuted will then be assessed identically to the account based pension wherever the commutation was allocated to (i.e. personal bank account or super accumulation account).
Only where some or all of the commutation was spent will it then reduce the assessable assets and deemed income for Centrelink purposes.
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Pre-1 January 2015 Grandfathered Account Based Pensions
For grandfathered account based pensions where income is assessed using the Centrelink Deductible Amount Method, a commutation will affect the calculation of the deductible amount.
Making a commutation of an account based pension will reduce the deductible amount.
To avoid reducing the deductible amount of an account based pension as a result of a lump sum commutation, one could simply opt for an increased pension payment, instead.
However, keep in mind that the increased pension payment would increase the assessable income of the pension for that year, which would be counted for Centrelink income test purposes and may reduce or eliminate any Age Pension entitlements.