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.
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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.
Specifically, if you have reached your preservation age, yet are still working, you might have started a non-commutable account based pension.
If you have met a retirement condition of release, or reached age 65, you may have commenced an ordinary account based 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.
In relation to account based pensions, the process of a rollback means you are transferring your savings from tax free pension phase into accumulation phase, where earnings are taxed at up to 15%.
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.
Furthermore, a rollback might require investments to be sold down which could incur transaction costs such as fees, brokerage or buy/sell costs.
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.
Leaving the commutation of a grandfathered pension in accumulation phase, or starting a new pension, will result in this balance being deemed for Centrelink Income Test purposes.
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.
If you are under Age Pension age, rolling back a pension to accumulation phase will mean that the capital is no longer assessed under the Centrelink Assets Test.
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.
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It was interesting reading your article.I. Am commuting my pension account balance to accumulation an accumulation account.
As a trustee the auditor requires me to raise a minutes to reflect this.
Do you have a template I can use to do this minute.
Regards
Sue
Hi Sue, Idon’t have one, but I googled SMSF Minute example and found this link https://www.esuperfund.com.au/investments/investment-minutes The example template provided doesn’t relate to rolling back a pension to accumulation, but at least you can get an idea of the format. I would say you would need to include things like amount balance rolled back, date of rollback, tax components, preservation components, min pension requirements met, etc.
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What are the rules for rolling a pension account to accumulation, then say 12 months or more later, transferring some or all the the amount transferred back to a pension account
Hi Emanuel, you can generally transfer all or some of a pension back to accumulation phase and then use some or all of that amount to recommence a new pension. Any amount rolled back will provide a credit for Transfer Balance Cap purposes.
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What happens to preserved and non-preserved components when you rollback a pension (unrestricted non-preserved) into ana accumulation account that is fully preserved. Do they remain separated or does the entire balance go into preserved.
Great question Daniel. My interpretation is that they retain their preservation status regardless of where they are held
What asset would be beneficial to roll back into super? Growth or defensive?
I assume you are talking about rolling back from pension to accumulation phase.
As a very general rule of thumb it would be growth assets to roll back, this is because they usually provide less income and therefore less income tax each year. Also, because growth assets have a higher growth expectation, the asset might be able to be trnasferred back into pension phase at some stage in the future prior to being sold and therefore received tax free.
Pension phase is also better suited to assets with less volatility to provide more certainty of income and less likely to be sold at a signficiant loss over the short-term to cover pension payments.
Hope that helps,
Chris
Hello Chris,
I and my wife are contemplating rolling back our pensions (SMSF) to accumulation phase so that we can may Downsizer Contributions for each of us. I am age 67 and my wife is 65 and neither of us are working.
Once contributed we would then restart the pensions for both of us.
Are you aware of any significant downside in this strategy
Hi David,
There are several to consider with this strategy. Firstly, I’m not sure why you are considering rolling back your existing pensions. Depending on your situation, it may be better not to. Rolling back could have other ramifications. Unfortunately it’s a very broad question. Without knowing your full situation, it’s very difficult to determine the potential risk or considerations.
Sorry I am unable to be more precise.
Regards,
Chris
Hi Chris,
Would love it if I could clarify:
1. The lifetime transfer balance Cap is 1.6 Mill (currently). If we transfer $600K from super to pension and commute $100K (either by transferring back to Super or lump sum withdrawal) from pension account. Does that mean my lifetime cap is now reduced to $500K?
2. In your above example: if I had used my lifetime cap of $1.6mill to start a pension account, does it mean I won’t be able to commute and reduce this lifetime cap anymore?
Regards,
Cheryl
Hi Cheryl,
Withdrawals from a pension account in the form of rollbacks to accumulation or lump sum withdrawals (pension commutations) will provide a credit, but pension payments will not. So, yes, the cap would reduce to $500k. The credit applies regardless of whether you have maximised the cap or not. However, keep in mind that when the cap increases due to indexation (e.g. $1.6M to $1.7M) you do not necessarily get an additional $100k cap. Your additional cap will be based on the proportion of the cap you have already used. So if you have maximised the $1.6M and the cap subsequently increases to $1.7M, you do not get any additional cap, because you have already utilised 100% of the cap. If, say, you have only used $800k of the cap, you would get 50% of the indexed cap amount ($50,000) of the cap increased to $1.7M. I hope that makes sense.
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Hi Chris,
In order to increase the tax-free component of my pension account I recently withdrew 300k from my pension and accumulation accounts (200k from pension + 100k from acc account) and recontributed it to the accumulation account using the bring forward rule . I became 65 in august 2019. I then created another pension with most of the accumulation balance. Therefore I now have 2 pension accounts: the remainder of the initial one with a poor tax free component(P1) and the new one with almost all tax free component(P2). As I am still working full time I do not need the pension payments and try to figure out how to best reduce it for the time being without diluting my tax-free component of P2. The new pension P2 has been initiated on 10 July 2020 and both payments are set once per year at end of October. In the accumulation account I have around 7k left. I’m not sure if this is possible but you might have some suggestions.
Many thanks,
Rodica
Hi Rodica,
You need to ensure you receive at least the minimum required pension payment from each pension. Each withdrawal must be made proportionately from each component. By taking the minimum payment from a nearly 100% tax-free pension (P2), you are not diluting your tax-free component, but you are reducing your savings in the tax-free pension phase of superannuation. Should you choose to roll back the pension to accumulation phase, all earnings (positive and negative) are effectively applied to the taxable component. If you roll both pensions back to accumulation phase, the P2 pension is contaminated with P1 taxable components, as they will no longer be separate superannuation interests.
I probably haven’t told you anything you don’t already know, but there is no real way around this, assuming you have maximised your non-concessional contribution cap. If you have space in your non-concessional cap down the track and are eligible to make contributions, pension payments could be recontributed back into super.
Apart from that, you may consider calculating the difference in annual earnings tax payable (including potential death benefits tax) if you were to roll back to accumulation phase vs your current position of accumulating pension payments in your individual name and having earnings on these amounts taxed at your marginal tax rate.
Hope that makes sense.
Chris