This article discusses how to rollback a pension to accumulation within superannuation.
Within superannuation you can have an accumulation account and/or a pension account.
In fact, you may have separate accumulation accounts with different superannuation providers.
Likewise, you could have separate pension accounts with the same or different providers.
If you have a self managed superannuation fund (SMSF), you might have an accumulation account and/or one or more pension accounts.
Generally, if you have a SMSF, the investments within the SMSF will be pooled and the portion in each accumulation and pension account will be detailed in the member statements.
If you don’t have a SMSF, each of your pension or accumulation accounts will usually have it’s only investment portfolio or investment option.
To differentiate, retirement savings are said to be held in Accumulation Phase or Pension Phase.
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Provided you have met the relevant requirements, you can use some or all of your accumulation account to start a pension.
Non-commutable account based pensions are commonly referred to as transition to retirement (TTR) pensions.
Account based pensions are often also referred to as Allocated Pensions.
Pension Rollback Definition
A pension rollback is defined as all or part of a superannuation income stream being rolled back to superannuation accumulation phase.
Rollback Account Based Pension to Accumulation
If you have an ordinary account based pension, you have the option of rolling it back to accumulation phase at any stage.
It is not a requirement to rollback the total balance of the account based pension to accumulation.
You can do a partial rollback to accumulation if you wish. This might also be referred to as a commutation.
There are a number of reasons why you might want to rollback your pension to accumulation.
For instance, due to the minimum pension income standards, you are required to draw at least a minimum level of income each year from your pension.
If this income is more than you need and is building up in your personal bank account, you might want to reduce the amount in your pension by rolling it back to accumulation phase.
That way, the minimum pension factor is calculated on a lower balance.
You might not need any pension income from your superannuation at all and therefore rollback the total pension balance to accumulation.
If you are going to rollback a pension to accumulation phase, you need to have first met the minimum pension requirements for the relevant year.
A common reason that people rolled back some or all of their pension to accumulation just prior to 1 July 2017 was due to the introduction of the Transfer Balance Cap.
The Transfer Balance Cap, beginning at $1.6 million per person (indexed) limits the amount that a person can transfer into an account based pension.
If there was already an account based pension in place prior to 1 July 2017, the excess amount had to be rolled back or withdrawn from super as a pension commutation.
Another common reason for pension rollbacks to accumulation phase is to refresh, or recast, a pension.
A pension refresh involves commuting the total pension balance back to an accumulation account to combine it with contributions that have been made to the accumulation account since the pension was initially commenced; and then starting a new pension with the consolidated balance.
This is done, primarily, to place more retirement savings in pension phase and to simplify the administration and investment strategy of superannuation savings.
Rollback TTR Pension to Accumulation
Despite a Transition to Retirement Income Stream (TRIS / TTR) being a non-commutable account based pension, it can be commuted if it is rolled back to an accumulation account.
The reference to the term non-commutable means that a pension commutation can’t be made as a lump sum withdrawal out of the superannuation environment.
Although a TTR Pension balance does not count towards the Transfer Balance Cap, the 1 July 2017 changes also resulted in TTR rollbacks to accumulation.
The reason for this was because, from 1 July 2017, earnings from investments within a TTR Pension stopped being received tax free.
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As of 1 July 2017, all earnings received from investments within a TTR Pension are taxed in the same way as an accumulation account.
This reduced the tax-effectiveness of TTR Pensions and TTR strategies.
The tax rate in accumulation phase is 15% on all earnings.
Capital gains tax (CGT) is taxed at 10% if the investment sold was owned for longer than 12 months.
Rollback Pension to Accumulation Considerations
There are a few things to consider when rolling back from pension to accumulation.
You also need to consider that rolling back any pension savings to accumulation means that you may be reducing or eliminating the income that you were receiving from this source.
That income may have been used to help cover living expenses.
There may even be CGT consequences of rolling back a TTR Pension to accumulation.
If you commute a pension back to accumulation phase within a SMSF, the Trustee and members will need to complete minutes.
The minutes of the rollback will include how much was rolled back, the date of the rollback and the remaining pension balance.
The final, yet no less important, consideration of rolling back to accumulation relates to grandfathered pensions.
Full commutation of an account based pension, including a pension refresh strategy, will mean the pension is no longer grandfathered.
This could significantly reduce Centrelink Age Pension entitlements, or other social security benefits.
It will no longer be assessed using the Centrelink Deductible Amount provisions.
Partial commutation of an account based pension will generally not affect the grandfathering of the pension.
Rollback Pension to Accumulation Transfer Balance Cap
The Transfer Balance Cap works on a credit/debit system. This means that any amount transferred into a pension from accumulation counts towards the Transfer Balance Cap.
Conversely, a full or partial pension rollback to accumulation will reduce the amount counted towards the Transfer Balance Cap.
In relation to indexation of the Transfer Balance Cap, the usage of the Transfer Balance Cap will be calculated on a proportional basis.
That is, if an individual has used the full Transfer Balance Cap of $1.6 million prior to the first indexation, they increase in the cap will not be available to them.