DIY super: Age Pension relief for SMSF lifetime pensions

In March 2009, SuperGuide reported that certain SMSF lifetime pensions would receive a reprieve from repaying Age Pension entitlements when failing a solvency test (see Light relief for  SMSF lifetime pensions). The solvency test is conducted by an actuary who assesses whether the SMSF has a strong chance of having the capacity to pay the defined benefit pension payment each year for the expected life of the fund member.

The initial relief announced in March essentially meant that if your SMSF lifetime pension fails the solvency test, you won’t have to repay up to five years of any Age Pension entitlements. You would however lose your exemption from the Age Pension assets test, unless you transferred your pension assets to a special pension product offered by financial organisations. If you’ve tried finding one of these products you know they are rare and quite expensive. Also, many people were not too enthused about having to wind up a SMSF to take advantage of the relief.

We promised that SuperGuide would provide further details of this lifetime pension relief, and any changes to this relief, when draft legislation was available. According to the draft legislation tabled in Parliament this week, you still don’t have to repay any of your Age Pension payments received over the past five years, provided you convert your SMSF lifetime pension to a market-linked pension within your SMSF. And here’s the killer – you lose your assets test exemption.

The capacity to continue running a pension within a SMSF is an improvement on the original announcement, but now there is no option for retaining the assets test exemption. The market-linked pension, also known as a term allocated pension (TAP) is an account-based pension subject to special payment rules linked to life expectancy or to age 100.

The Self-Managed Super Fund Professionals Association of Australia (SPAA) is lobbying for the relief to be extended to enable individuals to retain the assets test exemption on their converted pension assets. If SPAA is successful in its efforts, then this will be good news indeed.

Note: The relief applies to SMSF assets test exempt pensions commenced before 20 September 2004, or assets test exemption pensions commuted and rolled over on or after 20 September 2004 and before 20 September 2007. The relief outlined in the draft legislation is available until June 2010.

If you believe you’re eligible for this relief then head directly to your SMSF adviser because this is a complex area of superannuation, and you have several payment options with the market-linked pension.

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