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Retirement phase income streams

Capped defined benefit income streams

Section: 16.13

Capped defined benefit income streams are a special category of retirement phase income stream created from 1 July 2017 as part of superannuation reform.

Complying income streams, as described in section 12.12, will be capped defined benefit income streams if they commenced prior to 1 July 2017 (except for lifetime pensions, which may commence at any time) since they have to meet the same SIS pension and annuity standards.

Due to the non-commutable feature of capped defined benefit income streams, it is not possible to commute any excess transfer balance they may create. For this reason, capped defined benefit income streams have special valuation rules for transfer balance cap and total superannuation balance purposes as well as the taxation of pension/annuity payments.

Capped defined benefit income streams include:

Capped defined benefit income streams Must meet SIS regulation
Lifetime pensions commenced at any time 1.06(2)
Lifetime pensions prescribed in tax reg 294-130.01(2) or (3), and in existence at 29 June 2007 (or such a pension paid from a successor fund at a later date). 1.06(2) excluding the rules concerning: commutations and the variation or cessation of pension payments to the child of a deceased or reversionary beneficiary.
Lifetime pensions prescribed in tax reg 294-130.01(4) that are provided on the grounds of invalidity under a public sector superannuation scheme. 1.06(2) excluding certain rules concerning the variation, suspension or cessation of pension payments
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)
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

From 1 July 2017, the only type of income stream that can be commenced that will meet the definition of capped defined benefit income stream is a non-commutable lifetime pension or a lifetime pension specifically included in the regulations. Lifetime pensions are often provided to Commonwealth, State and Territory public office holders, and military and civilian employees. Most of these schemes are closed to new members.

Capped defined benefit income streams have modified rules for:

  • the transfer balance cap
  • total superannuation balance, and
  • the taxation of pension/annuity payments.

Transfer balance cap modifications for capped defined benefit income streams

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 crediting a client's transfer balance account is known as the 'special value'.

The special value of capped defined benefit income streams are summarized 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 pensions prescribed in tax reg 294-130.01(2) or (3), and in existence at 29 June 2007 (or such a pension paid from a successor fund at a later date). 1.06(2) excluding the rules concerning: commutations and the variation or cessation of pension payments to the child of a deceased or reversionary beneficiary.
Lifetime pensions prescribed in tax reg 294-130.01(4) that are provided on the grounds of invalidity under a public sector superannuation scheme. 1.06(2) excluding certain rules concerning the variation, suspension or cessation of pension payments
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) 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  

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

Remaining term = number of years (rounded up to the nearest whole number) remaining on the term of the product.

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

Example: special value of a lifetime pension

On 30 June 2017, Joan was receiving a lifetime pension (a capped defined benefit income stream). The first payment Joan received after 30 June 2017 was a fortnightly payment 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: special value of a term allocated pension

On 30 June 2017, Tony had 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 minimum annual payment from the term allocated pension (TAP) at 1 July 2017 was $60,000. Tony was able to select an annual payment of +/-10% (i.e. between $54,000 and $66,000).

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

The value of Tony's term allocated pension for the purposes of the transfer balance cap was 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 had an opening balance of $353,225.81 in his transfer balance account on 1 July 2017.

Modified excess  transfer balance capped defined benefit income streams

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 one or more types of non-capped defined benefit income streams 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).

Modified excess transfer balance

Where a client holds a capped defined benefit income stream, 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 all of their capped defined benefit income streams.

Example: excess transfer balance, capped defined benefit income streams and no other income streams held

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

As Alice held a capped defined benefit income stream, the amount of excess transfer balance was calculated as the lesser of her:

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

Therefore, the amount of her excess was the lesser of:

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

Although Alice's transfer balance account exceeded 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: excess transfer balance, capped defined benefit income streams and other income streams

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

Lifetime pension $1,700,000
Account based pension $200,000
Total $1,900,000

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 stream 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.

Capped defined benefit income streams Must meet SIS regulation Special value for transfer balance cap
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)
Lifetime pensions prescribed in tax reg 294-130.01(2) or (3), and in existence at 29 June 2007 (or such a pension paid from a successor fund at a later date) 1.06(2) excluding the rules concerning: commutations and the variation or cessation of pension payments to the child of  deceased or reversionary beneficiary 
Lifetime pensions prescribed in tax reg 294-130.01(4) that are provided on the grounds of invalidity under a public sector superannuation scheme. 1.06(2) excluding certain rules concerning the variation, suspension or cessation of pension payments.
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  

Total super balance modifications for capped defined benefit income streams

From 1 July 2017, a client's total superannuation balance determines eligibility for a number of superannuation measures. See section 5 for more information.

A client's total superannuation balance includes the total value of a client's superannuation interests in both accumulation and retirement phase at the end of the previous financial year.

When determining the retirement phase value of a client's total superannuation balance, the balance of the client's transfer balance account adjusted to reflect the current value of account based income streams is measured.

Capped defined benefit income streams are included in the 'retirement phase value' of total superannuation balance as they are included in a client's transfer balance account.

The special value of a capped defined benefit income stream is credited to a client's transfer balance account either:

  • on 1 July 2017 for capped defined benefit income streams existing on 30 June 2017, or
  • on commencement for income streams commenced on or after 1 July 2017.

Therefore where a client has a capped defined benefit income stream, it is generally the commencement value for transfer balance cap purposes that counts towards a client's total superannuation balance. An exception is term allocated pensions, see below for further information.

Adjustment for term allocated pensions

A client's transfer balance account is adjusted when measuring a client's total superannuation balance where the client has a term allocated pension. The special value of a term allocated pension is adjusted for the purposes of measuring the client's total superannuation balance each 30 June.

Effectively, the account balance of the term allocated pension is used in the calculation of total superannuation balance each 30 June and any existing credits or debits in relation to a term allocated pension (other than debits for structured settlement contributions or debits in respect of non-commutable excess transfer balances) are disregarded.

Where the client holds other types of capped defined benefit income streams the transfer balance account does not get adjusted for the purposes of total superannuation balance calculations.

Last modified: Wednesday, July 24, 2019