SMSF actuarial specialist Accurium explained that each retiree will commence a transfer balance account (TBA) once they start a retirement phase income stream to track compliance against their TBC. 

Credits will “add” to the TBA (e.g. when starting a retirement phase pension) and debits will “reduce” the fund’s TBA (e.g. when paying a lump sum or commuting monies from an income stream). Generally, credit or debit is based on market value (e.g. purchase price of pension), with special rules for “capped defined benefit income stream” events.

Accurium head of education Mark Ellem said the indexation will require strategies to place greater considerations on the risks that may arise when looking at the transfer balance account, particularly when approaching compliance for the TBC and strategies to best maximise the personal cap.

“What we need to consider in the lead-up to 30 June 2021 is an additional risk for SMSF members from indexation due to delayed reporting timelines, so therefore, it’s prudent to report all those TBA events up to 30 June 2021 as quickly as possible,” Mr Ellem said in a recent webinar.

“There are always questions regarding do we have to report pensions commencing because we effectively include that in the SMSF annual return, and the answer is you must report TBA events via a TBAR.

“They are not reported by the SMSF annual return. The ATO will not get the details for an individual’s transfer balance account’s debits and credits starting pensions and commuting them via the SMSF annual return.

“They will only get them through lodging a transfer balance account report, so if there are TBA events that need to be reported, you must report them via a TBAR.”

Mr Ellem said it’s important to remember that entitlement to proportional indexation is based on the highest TBA balance.

“There are some questions on what if the transfer balance account goes negative, what if we stop commuting the pension back to accumulation and therefore we have no balance or very little balance,” he said.

“That won’t work as it is based on the highest balance, it’s not based on the balance just prior to 1 July 2021 and it doesn’t matter if the transfer balance account goes negative because your debit from your commutation is greater than the credit from when you commenced; it is based on the highest balance during the period 1 July 2017 through 30 June 2021.”

Further, Mr Ellem noted it will be important to take into account any pending credits that will arise prior to 1 July 2021 for those reversionary pensions that commenced in the last financial year where the credit has arisen or will arise during this financial year, as it will affect the entitlement to indexation of their personal cap.

“If the date of death of a member with a reversionary pension is between 1 July 2020 and 30 June 2021, then the TBA credit won’t affect indexation because that TBA credit will arise 12 months later and after 30 June 2021; even if they passed on 1 July 2020, that credit is arising on 1 July 2021,” Mr Ellem said.

“However, if the date of death of an original member with a reversionary pension is before 1 July 2020, particularly between 1 July 2019 and 30 June 2020, then it will have an effect, as the TBA credit will arise no later than 30 June 2021 and therefore needs to be taken into consideration.”

For those who are about to commence their first retirement phase pension, Mr Ellem reminded SMSFs to think about the timing of when they should be commenced from pre-1 July 2021 against on or after 1 July 2021.

In an example provided by Mr Ellem, Valerie, aged 63, is retiring on 26 March 2021 and has super entitlements of $2 million.

“She’s commencing her first retirement phase pensions and she’s thinking about when should I do this. She’s thinking, ‘I’m retiring tomorrow, therefore, I’m eligible and I meet a condition of release with a nil cashing restriction, so when should I retire?’

“Now, obviously, if she commences that before 1 July 2021, then the most of that $2 million she can put in the retirement phase is $1.6 million. She waits one day to 1 July and, note she hasn’t got a transfer balance account at all because she hasn’t commenced a retirement phase pension up to and including 30 June 2021, so she gets full indexation $1.7 million.

“So, we need to consider those clients who may be retiring now who are about to retire and commence a retirement phase pension for the first time to consider that timing of when they should commence their pension.”

While there will be a focus to better prepare for pending reversionary credits that may impact clients, there also needs to be care in managing a non-reversionary pension especially when thinking about the death benefit, according to Mr Ellem.

“We know that when a member dies, we must pay a death benefit as it’s the only compulsory cashing event under the SIS legislation where members’ benefit must be cashed as soon as practical,” Mr Ellem said.

In another scenario provided, Max, aged 48, has accumulation benefits of $700,000 and a death cover of $1 million and, unfortunately, passed away on 24 March 2021.

“His spouse Margot, aged 47, has some accumulation benefits of $300,000 but hasn’t commenced a retirement phase pension as she’s not able to, but those benefits from Max, $1.7 million being his accumulation account plus insurance cover, can now be used to commence a death benefit pension,” Mr Ellem explained.

“Indeed, in this situation, there might be a requirement to pay it out as a lump sum to pay off a mortgage and pay off debts, but what if they wanted to retain at the maximum amount inside of super as the death benefit pension?

“Again, the consequences of paying this pension or commencing this death benefit pension, where cashing in the death benefit is required under the law before 1 July 2021 or after 30 June 2021, can have a consequence of extra hundred thousand dollars that can be retained.”

Mr Ellem noted when thinking about the deadline for commencing the death benefit pension, it must be done as soon as it can practically be commenced.

“But we need to think about when that will happen. We know the ATO says roughly six months that we want that paid and it could be that the credit doesn’t arrive for 12 months, but the idea is it needs to be paid as soon as practical,” he said.

“The issue here is with this situation with Max passing away. Our rule-of-thumb six months is fairly straightforward: if we take this past 30 June, we can delay effectively paying that death benefit, and again, if it’s assuming there are valid reasons why it can’t be paid now; but if we delay it, if it can be validly delayed until after 30 June 2021, then there’s an extra hundred thousand dollars that can be in there in that retirement phase pension.”