Legislation changes give market-linked pensions better outcome
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Doug McBirnie, managing director of Accurium, said legislation passed last year now allows term-allocated pensions (MPL) started after 1 July 2017 to be partially commuted where they have an excess Transfer Balance Account amount meaning it is now possible to restructure these pensions to avoid the tax treatment imposed on large capped defined benefit income streams (CDBIS).
Before the introduction of the Transfer Balance Cap in 2017, MLPs were treated differently to normal account-based pensions.
As these income streams are non-commutable, it was not possible to roll back the excess above $1.6 million to get back under the TBC and instead the pension payments from large balance MLPs become taxable.
Mr McBirnie said that generally, 50 per cent of the value of pension payments from MLPs and other CDBIS above the defined benefit income cap (currently $106,205 pa increasing to $118,750 at 1 July 2023) is fully assessable and taxed at the individual’s marginal tax rate.
“While MLPs are classed as non-commutable income streams, it is possible to commute them if the proceeds are used to immediately start another MLP,” he said.
However, MLPs started after 1 July 2017 are no longer considered as a CDBIS which means pension payments are no longer taxed under the defined benefit income cap.
“The downside is that the new pensions are assessed for transfer balance account purposes under the account-based pension rules. MLPs whose balances at commencement are above the TBC may be liable for excess transfer balance tax and, until recently, there was no remedy,” he said.
The newly passed legislation has negated that problem so it is now possible to restructure these pensions to avoid the tax treatment imposed on large CDBISs.
Additionally, the legislation also clarified how the commutation value should be calculated for legacy MLPs meaning there is greater certainty for advisers when assisting clients with these pensions on how to best structure their affairs.
If done correctly, the restructuring can have significant benefits for clients including the fact that MLPs are no longer classed as CDBIS pension payments so are no longer taxed.
It can also increase flexibility and liquidity as capital can be freed from the restrictive MLP structure, providing more flexibility to meet income needs and aid in estate planning by allowing more capital to be gifted to beneficiaries before death, potentially reducing superannuation death benefit taxes
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