In order to be able to commute an account based pension, certain pro rata pension payment rules must be met, Mr Day explained.

For a partial commutation, Mr Day said the adviser will need to ensure that the remaining balance in that original pension is at least equal to the minimum amount that’s required to be paid which is generally not a problem.

For a full commutation, the client will need to receive at least a pro rata minimum prior to the lump sum being paid, he said.

“To give an example, let’s say we’ve got a member who fully commutes on 1 January and they normally take an annual payment of $50,000 in June. Now if they’re going to fully commute in this situations and they pull out $330,000 and put that back in, they need to receive at least a $25,000 pension payment at the time of the commutation or prior to that. That’s really important.”

From a practical perspective, Mr Day said this might be easier for clients who are members of a large APRA-regulated fund, as the trustee of the super fund is going to manage the whole process.

“I’ve just got to remember to increase my pro rata payments up to $50,000.”

“However, if I’ve got an SMSF, then I’ve got to remember to actually pay myself that $25,000 pension payment. If I don’t, then I’ve actually failed the pension standards.”

In that situation, Mr Day said the tax rules state is that the pension will cease to be a retirement phase income stream on 1 July.

“[This means] you won’t be entitled to any tax free treatment of the underlying investment income and those pension payments that you’re drawing out will actually be a lump sum. So the investment income is now subject to tax, which is not a great outcome.”

“So you just need to make sure that the client is actually taking part of that full commutation as an income stream payment, then they’ve met the pension standards and you don't have to worry about that.

Where this payment has been forgotten, this will not only result in tax implications, said Mr Day, but a lot of reporting as well due to transfer balance cap credits that arise.

 “I’ve also got to go through the whole rigmarole process of recommencing a new pension and all the advice aspects of that including the statement of advice. It's just a nightmare. So make sure that they take their pro rata pension payment if they fully commute,” he said.