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Pension changes — are your pension documents up to date?

By Daniel Butler ([email protected]), Director, DBA Lawyers

The recent superannuation reforms substantially impact existing pensions from 1 July 2017. This means that pension documents will need to be updated prior to 1 July 2017 to reflect the latest changes and new pensions implemented from 1 July 2017 will also need to reflect the latest changes. This article focuses on some of the implications relating to the changes in respect of account-based pensions (‘ABP’) and transition to retirement income streams (‘TRIS’).

Changes impacting pensions from 1 July 2017

The following is a brief summary of the key pension changes that apply from 1 July 2017:

  • the $1.6 million transfer balance cap (‘TBC’) limits the amount of capital that a member can transfer to a pension on which an exemption from tax can be claimed;
  • members with an ABP will be eligible for a pension exemption subject to the member’s TBC;
  • on a pensioner’s death, a surviving spouse will also be limited to a single $1.6 million TBC and may need to restructure their own pension and any reversionary pension they receive from their deceased spouse to comply with the $1.6 million TBC measures;
  • a TRIS will not be entitled to a pension exemption;
  • a TRIS cannot be transferred to a reversionary beneficiary on the death of a member — only ABPs can continue to be paid to a reversionary beneficiary. Many members with a TRIS that have planned to revert their TRIS on their death to their surviving spouse will need to revise their estate planning. Only pensions in retirement phase, such as ABPs, will be permitted to revert after 30 June 2017. This change may come as a surprise to many. Moreover, the overall attractiveness of a TRIS reduces substantially from mid-2017 due to earnings on TRIS assets being subject to tax;
  • an election to convert a TRIS income stream payment to a lump sum for tax purposes to access the $195,000 low rate cap will no longer be available; and
  • an actuarial certificate will no longer be required for most funds providing ABPs.

Impact on pension documents

The reforms commencing 1 July 2017 will necessitate many changes to pension strategies and documents. We outline some key points that should be considered when obtaining pension documents as some suppliers may be slow to adjust their documents. DBA Lawyers’ documents have been revised.

Automatic conversion of a TRIS to an ABP

From 1 July 2017, earnings in respect of TRIS assets will generally be taxed at 15% (and 10% on net capital gains). Accordingly, members will be looking forward to converting their TRIS to an ABP at the earliest possible opportunity. In many cases this will be when they attain age 60 and cease an arrangement of gainful employment. On satisfying this condition of release, the TRIS can convert into an ABP. There is no need to commute or roll back the TRIS since the TRIS can convert into an ABP — and with it, two limitations that previously applied to a TRIS are removed (ie, the 10% maximum annual payment limit and the inability to pay a lump sum).

DBA Lawyers’ documents automatically convert a TRIS to an ABP upon the member attaining a relevant condition of release. Many other supplier’s documents do not have this feature. Moreover, we also offer a TRIS to ABP Conversion Kit that can convert an existing TRIS to an ABP.

Automatically reversionary pensions

Unless an ABP is automatically reversionary it will cease on the member’s death in accordance with the ATO’s view in TR 2013/5. This tax ruling provides that a pension ceases on death, unless an SMSF trustee has no discretion but to continue the pension following the member’s death.

The governing rules of the pension and the SMSF deed must contain special wording (including a fetter) to ensure a pension will qualify as automatically reversionary. Generally a trustee’s discretion cannot be limited (or, in legal terms, ‘fettered’) and therefore many people who mistakenly believe they have an automatically reversionary pension may find out when it’s too late (eg, after their spouse’s death, when their spouse’s pension has ceased and the surviving spouse’s options may be considerably disadvantaged).

Other strategic and value added features

DBA Lawyers’ pension kits include numerous strategic and value added features not found elsewhere. These features include:

  • Additional trustee resolutions to record any changes from the time the pension commenced, eg, if the pension commenced based on estimated figures and more accurate figures subsequently becomes available, these resolutions record the correct figures as soon as they become available.
  • Segregation resolutions to segregate assets to fund a pension. Note that:
  • the ATO consider that a fund is segregated if 100% of the fund’s assets are applied towards funding pensions; and
  • from 1 July 2017, if an SMSF member is receiving an ABP (or another pension in retirement phase, such as a lifetime pension) and has a total superannuation balance (which includes any interests in any other superannuation funds including any industry or retail superannuation funds) that exceeds $1.6 million, the fund trustee will not be permitted to apply the segregation method in calculating the pension exemption and will be required to apply the unsegregated method.
  • a tool to determine the minimum amount of the pension that needs to be paid for a financial year.

Why disclose information to members?

There are many SMSF trustees that commence pensions without providing a product disclosure statement (‘PDS’).

We strongly recommend that a PDS be provided to the member before any ABP or TRIS commences. It is worth stressing here that under the Corporations Act 2001 (Cth), the PDS must be issued by the trustee to a member prior to the earlier of the member electing to take their benefit by way of pension or the trustee making the first pension payment.

Moreover, an adviser, who is providing factual information, could also provide their client a PDS to help them make an informed decision. A PDS assists advisers who have an Australian Financial Services Licence (‘AFSL’) as well as those that do not.

If the adviser does not have an AFSL, they may be in a difficult position unless an appropriate PDS is provided. Indeed, an unlicensed adviser who provides a Product Spin Document (‘PSD’) (rather than a PDS) could be in deep water as that would be evidence that financial product advice has been provided by an unlicensed person. Some suppliers provide a PSD. A PSD, as you may guess, seeks to encourage people to obtain an interest in a superannuation fund or a pension rather than provide factual information on which a member can make an informed choice.

In addition, a PDS should reflect all the latest changes in the law and provide guidance to clients on the impact of the reforms for them and their dependants following their death. For example, the implications of the TBC need to be understood by those with an ABP with more than $1.6 million in superannuation. Moreover, where a couple has between them close to or in excess of $1.6 million in superannuation, they need to be aware of the estate planning implications, namely as noted above, a deceased member’s TBC does not transfer with a reversionary pension to the surviving spouse.

Members who take the time to read a PDS may benefit greatly from an increased understanding of the complexities of the superannuation system. Some may also greatly appreciate the extra information available to them and realise the vital link to their estate plans, etc.

AFSL criteria

DBA Lawyers’ pension documents have been prepared to assist advisers whether or not they have an AFSL. In particular:

  • — if the adviser has an AFSL or is an authorised representative of an AFSL holder — the adviser should consider whether a statement of advice needs to be provided; or
  • — if the adviser is not covered by an AFSL — whether the adviser should obtain an AFSL if financial product advice is provided. If only factual or tax advice has been provided, then an appropriate written disclaimer should be provided.

Many other suppliers pension documents will result in extra attendances by the adviser as a statement of advice or AFSL risks may arise when the adviser assists in a client commencing a pension. DBA Lawyers have sought to minimise any unnecessary AFSL attendances on advisers by designing the documents to minimise an advisers AFSL obligations.

Conclusions

The super reforms require a major rethink of pension strategies and documents. Having quality SMSF and pension documents can add significant strategic advantage and greatly assist members and advisers towards achieving an optimal outcome.

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

Note: DBA Lawyers hold SMSF CPD training at venues all around. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.

For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.

DBA LAWYERS                                                                                                                     

11 January 2017

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