Q: I saw SuperGuide’s article about not being able to add to a pension once it’s started. Does this mean that it’s not allowable to commute the pension, add the additional funds, and then restart a “new pension” with the increased amount? Obviously, all on the same day.
A: Background here, once we start a pension within super, we’re not allowed to put any more capital. We can’t add it to that pension by way of contributions or capital. Now, of course, the pension balance can grow with things like interest and dividends and rent. Earnings can increase the value of our pension, but we can’t add more capital to a pension. So, if we’ve got a pension running and we make a contribution, we can’t mix that contribution in with our current pension.
But we’ve got some choices here. We could stop, commute the existing pension. We could roll that back to accumulation phase, which means all the money we had in pension is now mixed with all the money we had in the accumulation phase, and then we could start a new larger pension with all of that money from the accumulation phase. That’s certainly an option. So, you could stop the pension, take it back to accumulation. You’ve now got all the money in accumulation, and then you could start a new pension with it.
But just another thing to keep in mind is we’re not restricted from the amount or number of pensions that we have. So, another way that could be considered is, instead of stopping the existing pension, you could start a second pension, or a third pension, or a fourth, or fifth, and so on, with what’s in your accumulation. So, you’ve got your pension running, you make a contribution. Instead of stopping the pension, we just take the money in the accumulation, and we commence a new second pension, and you run those two pensions side by side, or third pension or fourth pension. I’ve had clients with 10 or more pensions running.
You need to think about obviously fund efficiencies and fund administration costs. If your administrator charges you per pension, maybe think about combining the two. If they don’t, you might think about running those in conjunction side by side. The real key here actually comes down to tax components. I’ll give you an example, let’s just say that I’ve got my pension running today, and it’s a $1 million pension, and it’s made up all of my taxable component. I’ve had some advice and they’ve said, ‘Garth, make a non-concessional of contribution’, call it $330,000, and I make that contribution today.
If I stop my pension, my $1 million dollar pension, and take it back to accumulation, I’m going to mix up, I’m going to blend that $1 million dollar pension money or taxable component with my tax-free component in accumulation, and they’re blended together. I can’t separate them.
Instead, if I started a second pension with the $330,000, that’s always and forever going to be 100% tax free component. It gives an estate planning benefit. But to answer your direct question, yes, you can stop your pension, combine with the accumulation account and then restart a larger pension if you want to, or you could consider, as I mentioned, running multiple pensions.