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Capped defined benefit income streams

Transfer balance cap modifications

Section: 20.2

Due to the non-commutable nature of capped defined benefit income streams, the following modifications to the transfer balance cap rules apply:

  • the 'special value' of the capped defined benefit income stream is the value credited to a client's transfer balance account and measured against the client's transfer balance cap
  • where a client only holds capped defined benefit income streams that are otherwise excessive, they will not be subject to excess transfer balance tax and will not be required to commute any amount of their capped defined benefit income stream
  • where a client holds both capped defined benefit income streams and other retirement phase income streams, that in combination exceed their transfer balance cap, they are required to commute income streams that are not 'capped defined benefit income streams' and may be subject to excess transfer balance tax.

Special value of capped defined benefit income streams

The value of a capped defined benefit income stream for the purpose of the transfer balance cap is known as the 'special value'.

The special value of capped defined benefit income streams are summarised in the table below.

Capped defined benefit income streams Must meet SIS regulation Special value for transfer balance cap
Lifetime pensions commenced at any time 1.06(2) Annual entitlement x 16
Lifetime annuities commenced prior to Annual entitlement x 16 1 July 2017 1.05(2)
Life expectancy pensions and annuities commenced prior to 1 July 2017 1.06(7), 1.05(9) Annual entitlement x remaining term
Market-linked pensions and annuities commenced prior to 1 July 2017 1.06(8), 1.05(10)
Any income streams set out in the regulations to be capped defined benefit income streams As set out in the regulations

Due to the specific product features required to meet the specified SIS regulations in the table above advisers should confirm with the product provider whether the income stream is a capped defined benefit income stream.

A capped defined benefit income stream's special value is determined by whether it is a lifetime or term certain income stream.

Lifetime pensions and annuities

The special value of a capped defined benefit income stream that is a:

  • lifetime pension commenced at any time or
  • lifetime annuity commenced prior to 1 July 2017

is calculated as:

Special value = annual income entitlement x 16

Where annual income entitlement = first payment an individual is entitled to receive after the valuation is required ÷ number of days in period relating to payment x 365

Term certain pensions and annuities

The special value of a capped defined benefit income stream that is a:

  • life expectancy income stream commenced prior to 1 July 2017 or
  • market-linked pension commenced prior to 1 July 2017

is calculated as:

Special value = annual income entitlement x number of years (rounded up to the nearest whole year) in the remaining term

Where annual income entitlement = first payment an individual is entitled to receive after the valuation is required ÷ number of days in period relating to payment x 365

Regulations may also specify a method for determining the special value of an income stream. At the time of writing no regulations had been written for this purpose.

Example: lifetime pension

On 30 June 2017, Joan is receiving a lifetime pension (a capped defined benefit income stream). The first payment Joan receives after 30 June 2017 is a fortnightly payment on 4 July 2017 of $3,000.

The special value of Joan's lifetime pension is:

Annual income = ($3000/14) x 365 = $78,214.29

Special value = $78,214.29 x 16 = $1,251,428.57

Joan will have an opening balance of $1,251,428.57 in her transfer balance account on 1 July 2017.

Example: term allocated pension

On 30 June 2017, Tony has a term allocated pension (also known as a market linked pension) with an account balance of $319,800, and a remaining term of 5.5 years.

The calculated annual payment from the term allocated pension (TAP) is $60,000. Tony is able to select an annual payment of +/-10% (ie. Between $54,000 and $66,000).

Tony's TAP is a capped defined benefit income stream. Tony chooses to receive $5,000 per month, on the last day of each month in 2017/18.

The value of Tony's pension for the purposes of the transfer balance cap is calculated as follows:

Annual entitlement = ($5,000/31) x 365 = $58,870.97

Special value = $58,570.97 x 6 = $353,225.81

(Note the remaining term of 5.5 years is rounded up to 6 years for the purposes of this calculation).

The special value of Tony's TAP is $353,225.81. It's interesting to note that this value exceeds the account balance of Tony's pension by $33,425.81. Tony will have an opening balance of $353,225.81 in his transfer balance account on 1 July 2017.

Modified excess transfer balance

Where a client only holds capped defined benefit income stream(s), a modification applies to ensure that they will not be subject to excess transfer balance tax where the balance of their capped defined benefit income stream(s) exceeds their personal transfer balance cap.

However where a client has one or more capped defined benefit income streams as well as another type of non-capped defined benefit income stream such as an account based pension, they will have an excess transfer balance amount to the extent that it can be attributed to non-capped defined benefit income stream(s).

To achieve this, the value of the client's excess transfer balance is calculated as the lesser of:

  • the value of their transfer balance account minus their personal transfer balance cap, or
  • the value of their transfer balance account minus their capped defined benefit balance.

The 'capped defined benefit balance' is the sum of all transfer balance credits and debits in respect of capped defined benefit income streams.

Example: only capped defined benefit income streams

At 30 June 2017, Alice was receiving a lifetime pension (capped defined benefit income stream) with a special value of $1,700,000. She does not have any other income streams.

As Alice holds a capped defined benefit income stream, the amount of excess transfer balance is calculated as the lesser of:

  • transfer balance account - personal transfer balance cap, or
  • transfer balance account - capped defined benefit balance.

Therefore, the amount of excess is the lesser of:

  • $1,700,000 - $1,600,000 = $100,000
  • $1,700,000 - $1,700,000 = $0

Although Alice's transfer balance account exceeds her $1.6 million transfer balance cap by $100,000 on 1 July 2017, she does not have an excess transfer balance as the excess is entirely attributable to a capped defined benefit income stream.

Example: capped defined benefit income streams and other income streams

Continuing on from the previous example, if Alice commences a $200,000 account based pension on 1 June 2018, her transfer balance account will be:

  • $1,700,000 (lifetime pension)
  • $200,000 (account based pension)
  • $1,900,000 TOTAL

As Alice holds a capped defined benefit income stream, the amount of excess transfer balance is calculated as the lesser of:

  • transfer balance account - personal transfer balance cap, or
  • transfer balance account - capped defined benefit balance.

Therefore, the amount of excess is the lesser of:

  • $1,900,000 - $1,600,000 = $300,000
  • $1,900,000 - $1,700,000 = $200,000.

Alice has an excess transfer balance of $200,000, attributable to her account based pension. Alice needs to commute the $200,000 plus any notional earnings, and may be subject to excess transfer balance tax.

What if the balance of the other income streams is nil?

Where a member has both capped defined benefit income streams and other income streams, and they have an excess transfer balance, they will be required to commute the excess amount from their non-capped defined benefit income streams.

However, where the value of their non-capped defined benefit income streams is less than the amount of excess (for example, due to paying income stream payments or investment losses), and they only have superannuation remaining in capped defined benefit income streams, the ATO will issue a notice creating a debit equal to the amount of the excess in the clients transfer balance account. The result is that the client will cease to have an excess.

Example: excess transfer balance when other income streams are nil

Following on from the previous example, if the balance of Alice's account based pension was insufficient to transfer the full $200,000 plus notional earnings back to accumulation, her account based pension provider would act upon the commutation authority by commuting her pension in full and notifying the ATO.

Let's say that after the commutation of the account based pension, Alice had a remaining excess transfer balance of $2,000. In this case, the ATO would debit $2,000 from Alice's transfer balance account, effectively writing off the remainder of the excess.

Debit value modifications for transfer balance account

When a capped defined benefit income stream is fully or partially commuted, the debit value used to reduce the client's transfer balance account, is shown in the table below.

Income stream Must meet SIS standards Debit value
Lifetime pensions commenced at any time 1.06(2) Original special value less any debits
Lifetime annuities commenced prior to 1 July 2017 1.05(2)
Life expectancy pensions and annuities commenced prior to 1 July 2017 1.06(7)

1.05(9)

A new special value calculated at time of commutation (annual income entitlement x remaining term)
Market-linked pensions and annuities commenced prior to 1 July 2017 1.06(8)

1.05(10)

Any income streams set out in the regulations to be capped defined benefit income streams As set out in the regulations

Last modified: Thursday, January 11, 2018