How to choose a pension fund

Q: I’m drawing a pension from an account-based pension fund. Can that account be moved or switched to another better provider? If so, what is involved?

A: What we need to think about is that the super rules, the portability rules and general fund rules allow you to move money from one fund to another fund. We’re looking here at the superannuation rules allowing that. To do that, you would just need to follow any rules that are set out from fund one, your current fund, and then follow any required process set out by the second fund where you want the money to go to. The super rules allow it. You just need to check the fund-specific rules for both of those funds, the current fund and the receiving fund. What do they allow? What don’t they allow? Even though the super rules might allow something, the funds have their own specific rules which need to follow as well. They also might have their own specific process to initiate or to follow through with those rollovers. So do keep in mind that the super rules might allow it. What do the fund specific requirements include?

But to me, if I look into your question, the real question that comes out is, can I roll over an existing pension to another fund? We know rolling over accumulation benefits is common. It happens every day in the super world. People move money from one fund to the other all the time. But to me, the real question is, can you do that with a pension? Now, we need to look at this in three distinct ways, what the super rules allow, what the specific fund rules allow, and then really what happens in real life. When it comes to the super rules, your legislation, your regulations, there isn’t a lot I can refer you to around that. I can refer you to an ATO tax ruling, which was provided a number of years ago. It set out in the tax ruling that only a lump sum amount can be rolled over. That tax ruling then doesn’t look at what happens after you stop a pension, for instance, whether that stopping of the pension refers to a member rolling that money out or to a new account in an existing fund. The ATO ruling is not specific on what happens on rollovers after you stop a pension. It just says only a lump sum can be rolled over. They go on to say, if you want specific advice on that, you’ve got to go to them and ask for it.

When you then jump into the ATO roll over information, it sets out that an existing pension might need to be stopped or commuted before being rolled over to a new fund. When you think about it, it makes sense when you look and take into account the transfer balance account rules. We’ve told the ATO in a transfer balance account that a pension started. If we need to tell them it stopped, rolled over and new pension commenced, it makes sense that that process would be pension stops, back to accumulation, roll over accumulation, and then new pension being started. To me, if I look at the basics of super, it suggests that we might need to stop, rollover, start an accumulation and then start a new pension, not rolling over an existing pension. But as I mentioned before, what are the specific fund rules? I have heard from time-to-time people saying, “Yeah, but my fund allows a pension to be rolled over”. If that’s the case and your funds allow it, then deal with your fund and follow the required process that they look at. Do they allow pension rollovers from your current fund to the new fund? And does the new fund allow a rollover pension to come in?

I haven’t really seen that happen in real life. There may be an exception in some funds that I don’t deal with. If your fund is saying that you can roll over a pension, follow the process that they require. In general, the way that I see it happen in real life is I usually we see the pension fund one ceasing. Balances go back to accumulation phase, we set up a new account in fund two, and then we roll over the amount from the accumulation fund one to the new fund two before starting a pension in fund two. That is what I usually see in real life. I just want to make it clear, if your fund says they can do it and they provide your process to do it, by all means, do that or get some advice first.

Now, some things to consider because everything I’ve just been through is your theory. If you stop an existing pension and go back to accumulation phase, then all the tax components that made up that pension initially, get mixed together with the tax component of your accumulation account. Let’s just say that over years of planning, you’ve managed to isolate tax components, and maybe your pension is 100% tax-free pension, that you made a non-concessional contribution years ago and started a pension straight away with it. That could all be tax-free benefits. If you then take that pension, which was at the time 100% tax-free, roll it back to accumulation, it gets mixed up. All those tax components get blended together, and you may have undone years of tax planning, which is almost impossible to unmix those or to separate them again.

Do consider getting some advice here before you do that. It might be that you roll over any existing accumulation money to a new fund before you stop the pension and take those balances back to accumulation of face. It is something to consider if you have spent years and years of planning around separating those tax components, which I know a whole number of you do, just from the questions that we get.

We put an article out a few months ago on this – rolling over an SMSF pension to another fund. The same concept apply in this case. Could you roll over an SMSF pension? We’ll have a look at the article we did on that. But again, the processes and procedures would be the same for non-SMSFs. I believe the standard approach is to commute the pension before you roll it over. Have a look at your particular fund rules.