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Retirement phase income streams

Commutation rules

Section: 16.11

Pre 20 September 2007 term allocated pensions and complying, lifetime and life expectancy income streams cannot be commuted except in the following circumstances (and where permitted by the trust deed):

  • On the death of the primary or reversionary beneficiary where a lump sum payment is made to the legal personal representative or dependant(s).
  • If the term is based on the longer of two spouses' life expectancies, upon the death of both spouses.
  • Within six months of commencement (provided that it was not funded from the commutation of another complying income stream).
  • To purchase another complying income stream.
  • To pay a surcharge liability.
  • To make a payment split under family law.
  • For a release authority or transitional release authority.

Note: Financial hardship is not an exception to the non-commutable rules for complying income streams.

Rollovers of complying income streams
In addition, a complying income stream (lifetime, fixed term, or TAP) may be rolled over after 1 July 2007 provided it is rolled over to an income stream:

  • that meets one of the new standards (as set out in sections 16.3 to 16.11), and
  • also meets the standards set out in the old regulations for complying fixed term or term allocated income streams.

A complying fixed term or term allocated income stream can commence on or after 20 September 2007 from the commutation of another complying income stream provided that the new income stream also meets the new regulations. In the case of a new TAP, for example, this involves meeting the old TAP regulations and the new regulations. In practice, this means that the allowable term of the new TAP has to be chosen such that the total value of payments in each year is at least equal to the amounts determined using the percentage factors.

Important: Remember that, even though the rollover may be permitted, a pre 20 September 2007 income stream that is rolled over on or after 20 September 2007 may lose any assets test exemption status for social security.

Example - Rolling over a complying lifetime pension to a TAP

Tom has an SMSF in which he set up a complying lifetime pension for himself in 2000 as a result of potential excess benefits. The commutation value of his pension is $750,000 and he also has $120,000 in a solvency reserve in the fund supporting his pension. Tom requires regular actuarial advice in relation to his pension, which is proving costly and time consuming to administer. Subject to the rules of his complying lifetime pension to allow a rollover commutation, Tom can rollover to a TAP set up within his SMSF, provided that the TAP:

  • meets the new standards for an account-based pension, as set out in section 16.7. That is, it has minimum annual payments at least equal to the amount calculated using the new percentage factors; will pay a pro-rated minimum payment before any allowable commutation; cannot revert to an adult child and cannot be used as security for borrowing, and
  • also continues to meet the standards set out in the old regulations for complying term allocated pensions. That is, it is of a fixed term that is based on Tom's age and life expectancy; annual payments are determined using relevant pension factors and the pension cannot be commuted other than in very limited circumstances.

Last modified: Thursday, August 24, 2017