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The 1 July 2022 changes to the superannuation contribution rules will allow those aged over 67 to contribute into their superannuation funds without the need to meet a work test.
Many super fund members who may potentially benefit from these changes will already be accessing their retirement savings by way of a pension from their super funds.
While this presents new opportunities to top up your super pension even as you make withdrawals, consideration will need to be given to how these new contributions are handled.
Should these contributions be used to commence a new pension from their super fund?
Or do these members stop their existing pensions then recommence a new, larger pension which includes these new contributions?
Before deciding which approach is taken, certain issues need to be considered.
Super laws to consider
Prior to starting a pension from your super fund, your balances are held within an accumulation account. The super rules allow you to have only the one accumulation account within your super fund (although multiple accounts may be held across different super funds).
This restriction does not apply to pension accounts. The rules allow a fund member to have multiple pension accounts within the same super fund, a practice that is quite common for members of self-managed super funds (SMSFs).
There is, however, a restriction on adding further amounts to an existing pension once it has commenced. You can’t take contributions made after a pension has commenced and add them to that same pension account.
These contributions would need to be made to your accumulation account within your fund and then be dealt with from there.
To be clear, a contribution received after a pension has commenced cannot be added to the capital supporting that particular pension.
Where a fund member who is accessing a pension from their fund makes a contribution, they will need to decide what they intend to do with these contributions:
- They can leave the contribution in their accumulation account
- They can start a new, second (or third, or fourth etc.) pension from the fund, or
- They can stop (commute) their existing pension by rolling this amount back into their accumulation account and then recommence a new, larger pension from their fund.
We will look at each of these options in more detail below.
Option 1: Maintain the accumulation account
This would essentially be the ‘do nothing’ approach, with any contribution made simply remaining within that member’s accumulation account within the fund.
The outcomes from this would include:
- Any fund earnings on the amounts held in the accumulation account would be included in the fund’s assessable income for the year and subject to tax
- These earnings would be allocated to the taxable component of the member’s accumulation account.
Option 2: Commence a new pension
This approach would require the establishment of a new pension from the fund. This pension would be separate from any other existing pension that you may already be receiving from your fund.
In order to create this new pension, you would need to make sure that the appropriate processes are followed, which in most cases would include:
- The member making a request (or an application) to the fund’s trustee to commence a new pension from the fund
- The trustees would then set out a trustee resolution (or minute) to accept this request
- A pension agreement or terms would be drawn up setting out the rules or terms of that pension and a product disclosure statement (PDS) would usually need to be given to the member
- The value of the fund’s assets that support the pension would need to be determined at the start date of the new pension.
Under this approach, the minimum pension amount required each year will be based on the balance of this new pension, so you will now have multiple, separate minimum pension amounts that need to be paid each year.
As this new pension is separate to any existing pensions you may have, the earnings applicable to the new pension are allocated to the new pension account. These earnings are allocated to the underlying tax components that were used to commence this pension.
Option 3: Commute an existing pension and recommence a new larger pension
Under this approach, you would need to arrange for an existing pension to be commuted (stopped) and then rolled back into the accumulation phase of super.
The now commuted pension amounts would then be mixed together with your existing balance held in your accumulation account from your recent contributions.
You would then go through the pension establishment process to create a new, larger pension from your fund.
The process for this to occur would usually include:
- A member request would be made to the fund trustees to stop the existing pension on a certain date
- It is essential that the required minimum pension is paid BEFORE the pension is stopped. A pro-rata approach is taken to the minimum payment if and when the pension is stopped on a day other than 1 July
- The trustees would complete a resolution to accept this request and allow the commutation
- The pension balance would then be moved back into your accumulation account where the different tax components that now make up that accumulation balance would be mixed together and re-calculated
- The usual process, as set out earlier, to commence a new pension from your accumulation account would then need to be followed.
Whether you decide to commence a new pension, commute an existing pension or even maintain an accumulation account, there are fund administration issues that you may want to consider, including the ease of administration in future and any relevant estate planning issues.
Although the super rules allow a member to have as many pensions as they like, you would need to consider how this effects the ongoing fund administration. If the additional complexity results in higher administrative expenses charged by your administration service provider it would be a good idea to discuss this first.
Another consideration is around estate planning and how to ensure your wishes are addressed.
If you decide to commute an existing pension that was initially established as a reversionary pension so it automatically passes to your spouse, you may want to add a reversionary nomination to any new pension established if you are looking for the same outcome.
Similarly, where a new accumulation account is maintained after a contribution is received you may need to add a death benefit nomination to this new accumulation account if relevant.